A No Closing Cost Mortgage Can Be Very Costly

The term ‘no closing cost mortgage’ is used in many advertisements and announcements in order to attract potential borrowers who need a loan. The perception from the borrower’s point of view is, “Oh, no closing costs on a mortgage?  I like free! I’ll give them a call.” It must really work these types of advertisements have been around for years.

The problem with the no closing cost mortgage is it’s very misleading.  The people involved in a mortgage include the lender, the appraiser, the title company, surveyor, and many others depending on your location and contractual obligations.  Trust me when I say, everyone gets paid.

So what exactly does a no closing cost mortgage really mean?  It’s tough to say because there is no agreed upon definition of what a closing cost is. 

From a lender’s point of view a closing cost specifically means a cost to them, the lender.   From this point of view it’s true.  Instead of collecting a fee from you, they get paid by the end investor (the entity providing the funds for you).  So, in essence, their announcement is true; a no closing cost mortgage.

Now, as stated earlier, from the borrower’s point of view, it shouldn’t cost anything to purchase a mortgage.  What the buyer finds out is there are no costs paid to the lender but there are still plenty of other costs that have to be paid at closing; hence, closing cost.

How many other closing costs?  Well, that depends on a bunch of factors but some typical costs could include:

• Appraisal fee ($300-$500 average)

• Up front prorated taxes (possible thousands)

• Title insurance (few hundred to over a thousand)

• Survey (few hundred to over a thousand)

• Others

Of course, some of the ‘non-closing cost’ costs can be rolled back into the mortgage, decreasing the amount of money that has to be brought to closing.  Again, this depends on what the cost is and how much.

In any event, when the times comes and you need to borrow be sure to ask the lender how much out of pocket money you can expect to bring to closing.  You’ll be provided an itemized list of predicted costs.

The bottom line is a no closing cost mortgage, in many cases, can be very costly.

In summary, there are many lenders who advertise the phrase no closing cost mortgage. After a little digging, it turns out that a no closing cost mortgage has a lot of other expenses and can actually cost quite a bit.

Lease Option to Purchase–An Explanation Everyone Can Understand

A lease option to purchase simply means that a buyer can lease a property for a certain length of time (typically a year or two) and at the end of the lease they have the option to buy the property.  That’s it. Rent now; buy later (if you decide to buy).

The end.

Well, not really.  Even though a lease option to purchase is easy to understand we should take a look at how one actually works.

The reason a buyer might want to consider a lease option to purchase is because they cannot qualify for a typical mortgage.  This could be because of poor credit, no money, no job, etc.  A seller might consider one if they are having a tough time selling, the market is in a down cycle, etc.

Regardless of the reason, we’ll pretend that a buyer (Zack) and seller (Angie) have agreed to enter into a lease option to purchase agreement.

The first thing Angie and Zack do is figure out the details of the lease (rent) which include the monthly rent, how long the lease will last for and what utilities the buyer will be responsible for.

Angie was really looking for a one year lease. On the other hand, Zack needed at least two years because it will take him that long to improve his credit enough to allow him purchase the property.   The two finally agreed to a two-year lease at $1,500 a month and Zack would pay for all of the utilities.

With the lease portion behind them, they now had to discuss the purchase part which mainly includes the purchase price and down payment.  Of course, there are still other ‘normal’ contractual decisions that have to be made such as what appliances stay, is any personal property going to stay with the property, etc.

After much negotiation, Zack and Angie settled on a purchase price of $175,000 at the end of the two year lease with a $10,000 down payment, payable now.  The only problem Zack had with this agreement was he didn’t have $10,000 in cash. He only had $5,200 which left him about $4,800 short.

In the end, Angie agreed to take the $5,200 in cash if Zack agreed to pay the remaining $4,800 in equal installments of $200/month for the next two years.

Zack agreed, now making his monthly payments a total of $1,700.

Fast forward 23 months.

It’s been almost two years and decision day is coming.  Zack has to decide whether he wants to buy the house he’s been living in for the past 23 months.  If he decides not to buy the place he forfeits the $10,000 in down payment money.

However, if he decides to purchase the property (‘exercise’ the option) he’ll only owe $190,000. Those are his only two choices.

As it turns out, like the majority of the time, Zack didn’t have a choice.  He couldn’t follow through with his lease option to purchase because his credit score did not improve enough for him to qualify for regular financing.

On the last day of the lease Zack moved back in with his parents and Angie was able to put her house on the market and close sixty days later.

In summary, a lease option to purchase is an alternative way to purchase a property when regular financing is not an option.  Although some think it’s a complicated process it’s actually quite simple once you have a basic understanding.  In the end, most buyer do not carry through and actually purchase the property.

How to Sell a Home in Any Market

When learning how to sell a home in any market, especially a down market, it requires the home seller to stop thinking like a seller and start acting like a buyer.  I know it can be hard because they have certain expectations, needs and wants when selling. The reality is, though, a buyer simply doesn’t care what they expect, need or want.

In any event, the key to selling a home in any market is price and position.  Let’s say that Jack and Diane are looking to buy a home.  As of today we’ll say they looked at 37 properties in their target area with a price range between $250,000 and $300,000, give or take.

As expected, some of the homes were really nice and some, well, not so nice.

Just by default, out of the 37 homes, one property would be the best; one would be the worst and the remaining 35 fall somewhere between second and thirty sixth. 

Are you with me so far? Ok, great. Now, let me exaggerate here just for illustration purposes only.

Let’s pretend that one of the homes Jack and Diane looked at was only a single dollar; yes, only a single dollar. We’ll also pretend the house needs some work but it’s mostly cosmetic.  Well, no doubt, this home is the best positioned home on the market, even if it was in the worst shape of all 37.

So Jack and Diane give a full price offer of one dollar, the offer is accepted, and they now have a nice new home, completely paid for, in a neighborhood of homes priced around $250,000-$300,000.

I know this is an exaggeration but let’s continue.

What if the one dollar home was priced at a thousand dollars; a thousand times more than a dollar?  Right, Jack and Diane would have bought the house.

What if the home was priced at $100,000?  In a $250,000-$300,000 neighborhood you can bet they’d get full price in a split second.

Sure, a normal home seller wouldn’t sell their home for that low, I’ll agree. But the process is still the same. 

What if the home was priced at $200,000? While not as good as the one dollar deal, it’s still below neighborhood values.

If the one dollar house was priced at $250,000 all bets are off.  Out of the thirty seven other homes there very well could be a home better positioned. 

Maybe Jack and Diane thought another home priced at $260,000 was better positioned (even though it is priced higher) because it didn’t need any cosmetic work at all.  Everything is perfect the way it is.

The point being is, when a buyer looks at a home they are going to only make an offer on the house they feel is the best positioned compared to all other homes they’ve seen.

So how do you sell a home in any market? 

Simple.

Start thinking like a buyer and set appointments to look at all the homes you’re competing with. It shouldn’t take more than 10 minutes per home.  When you are completed with this step you simply compare your home to what you’ve seen and set the price that puts yourself in the number one position.

If your home sells in a few days then you know it was properly positioned. However, if another home you’re competing with sells first then you made a mistake.  For whatever reason, the buyer thought the other home was better positioned.

Once your home is the best positioned, in a buyer’s mind, it’ll be the next one to sell.

In summary, learning how to sell a home in any market is not difficult.  After all, no matter how bad things get homes still sell every day of the week.  By understanding things from a buyer’s point of view and understanding the concept of positioning, you’ll be sure to be the next home sold.

Homes With Lease Option to Purchase–A Selling and Purchasing Alternative

Homes with a lease option can be a great alternative when selling a home in a tough market.  Homes with a lease option can also provide a great alternative to a potential home buyer who doesn’t have what it takes to purchase a home in the more traditional way.

SELLER’S CHALLENGE

In a typical market most home sellers need to sell their home in order to purchase their next one.  They need the equity from their sale in order to provide the down payment for their purchase. The normal action is to hire a Realtor who advertises the property to the world and waits patiently for a buyer. But what happens when everything is done right and you can’t find a buyer to save your life?

BUYER’S CHALLENGE

When times are tough financially things can go bad quickly.  It doesn’t take long, in many cases, when someone loses their job and has to face the possibility of foreclosure.  When foreclosure takes place it drastically reduceS the home owner’s credit score making it all but impossible to finance another home for quite some time.  Medical bills can also cause nightmares.

So when things are bad what do buyers and sellers do?

They consider homes with a lease option to purchase. 

A lease means rent; an option to purchase means the buyer has the option to purchase the property AFTER the rental period is over.

Once the buyer and seller know the basics of a lease option it opens up new alternatives for both of them.  Let’s see how it works.

Sue the seller needs to sell her property and Bart the buyer needs to buy one. The problem is Sue’s house has been on the market for over a year; she can’t wait any longer.  Bart just went through a bankruptcy because of medical reasons and can’t buy a home because of bad credit.

So, Bart and Sue get together to discuss a lease option to purchase.  For the lease part they discuss the following:

• Length of the lease
• Monthly rent
• Who pays what utilities
• Individual responsibilities

For the option to purchase part they discuss:

• Purchase Price
• Down Payment
• Monthly payments
• What appliances stay

After much deliberation it’s been decided that Bart will lease the property for two years (24 months) for $1,500 a month which includes the water.  Bart is responsible for all maintenance and upkeep.  Nothing major can be done to the property during the lease.

It’s also decided that Bart will pay $5,000 up front along with an additional $200 per month in a separate account (escrow account) in the event he decides to carry through with the purchase.  If he does purchase the property the purchase price will be $200,000.00 which includes all of the appliances except the freezer in the garage.

Fast forward two years.

The option to purchase deadline is fast approaching.  Bart did everything right and his credit is now good enough to obtain a regular 30 year mortgage.

If he decides to purchase the property at the agreed upon $200,000 he’ll be able to use the $5,000 down payment PLUS the $4,800 in escrow ($200/month for 24 months) towards the purchase price.  With $9,800 in total, he’ll only have to finance $190,200.

However, if he decides NOT to purchase the property, Sue gets to keep the $9,800 and they both part their separate ways.  Sue will attempt to sell her property again and Bart will purchase another home.

The good news is the lease option gave both Sue and Bart alternative options during particularly difficult times.  Without the lease option Sue would have lost her home and Bart would have been in a stuffed 1 bedroom apartment listening to polka through thin walls.

In summary homes with a lease option can be a great alternative to selling a home in a tough market and/or someone with bad credit.  With a little extra understanding, homes with a lease option provide a solution where none previously existed.

No Closing Cost Refinance-Nothing is For Free

The term ‘no closing cost refinance’ is used in many advertisements and announcements in order to attract potential borrowers who need to refinance their current mortgage. The perception from the borrower’s point of view is, “Oh, no closing costs to refinance?  I like free! I’ll give them a call.” It must really work; these types of advertisements have been around for years.

The problem with the no closing cost refinance slogan is it’s not true.  No closing costs when refinancing?  Well, gosh, how the heck does this work? Everyone works for free?

The people involved in a refinance include the lender, the appraiser, the title company, and many others depending on your location and contractual obligations.  Trust me when I say, everyone gets paid.

So what exactly does no closing cost refinance really mean?  It’s tough to say because there is no agreed upon definition of what a closing cost is. 

From a lender’s point of view a closing cost specifically means a cost to them, the lender.   From this point of view it’s true.  Instead of collecting a fee from you, they get paid by the end investor (the entity providing the funds for you).  So, in essence, their announcement is true; a no closing cost refinance.

Now, as stated earlier, from the borrower’s point of view, it shouldn’t cost anything to refinance.  What the buyer finds out is there are no costs paid to the lender but there are still plenty of other closing costs.

How many other costs?  Well, that depends on a bunch of factors but some typical costs could include:

• Appraisal fee ($300-$500 average)

• Up front prorated taxes (possible thousands)

• Title insurance (few hundred to over a thousand)

• Others

Of course, some of the ‘non closing cost’ costs can be rolled back into the mortgage, decreasing the amount of money that has to be brought to closing.  Again, this depends on what the cost is and how much.
In any event, when the times comes and you need to refinance be sure to ask the lender how much out of pocket money you can expect to bring to closing.  You should be provided an itemized list of predicted costs.

The bottom line is a no closing cost refinance, in many cases, can be very costly.

In summary, there are many lenders who advertise the phrase no closing cost refinance. After a little digging, it turns out that a no closing cost refinance has a lot of other expenses that can actually cost quite a bit.

Calculate Property Tax-The Simple Way vs the Complicated Way

How to calculate property tax was an issue my wife and I discussed last spring.  It’s a reassessment year in our county and we were trying to figure out what the new tax bill might be.

I remembered from real estate school there was a formula that had about four steps to it.  Being a Realtor also, I was surprised to hear my wife say ‘you are doing it wrong’ because as a real estate paralegal (her full time job) she ‘knew’ how to calculate property tax. Yeah? We’ll see!

After a bit of research we realized we were both right.  There is a simplified way to calculate property tax and there’s a bit more complicated way.  It turns out the complicated way is, well, complicated.

CALCULATE PROPERTY TAX-QUICK AND EASY

The super simplified way calculate property tax is by taking the assessed property value, multiply it by the mill rate and divide by a thousand.

Um, ok, but what is the assessed property value and what is a mill rate?

Great questions. The assessed property value is the value the tax assessor places on your property.  This is usually different from what a licensed home appraiser would come up with, or what a buyer might be willing to pay.

A mill rate, is recognized as 1/1000th of a number.  It’s decided by the local governing authority based on what the budget needs are.  What ever the number is, divide by 1000.

Here’s an example of how to calculate property tax:

A home is valued at $100,000.  The mill rate is 20.  The calculation is:
$100,000 x 20 / 1000 = $2,000.

It’s pretty easy stuff; assessed property value multiplied by the mill rate (since mill rate is 1/1000th of a number you must divide by a thousand).

CALCULATE PROPERTY TAX–THE COMPLICATED WAY

Let’s assume this year is a tax reassessment year and your county needs ten million dollars to meet its budget demands, up from eight million three years ago. This amount includes the basic government services along with all current and future projects that have been approved by the board of trustees.

Once the budget amount has been calculated (ten million) the tax assessor will reassess the property values in order to meet the budget amount.

The tax assessor will take into consideration the estimated property value, proposed assessed valuation, state equalizer, exemptions and the current tax rate when establishing property taxes.

The following is an example:

Let’s say your home is worth $100,000 and the county has your assessment level at 10%.  Your tax will show a home value of $10,000. This is called a Proposed Assessed Valuation.

The tax assessor takes the Proposed Assessed Valuation and multiplies this by something called a State Equalizer.  In this example, the State Equalizer is 2.8439.  When you multiply the Proposed Assessed Valuation with the State Equalizer you’ll get the Equalized Assessed Value, or $28,439.

Once the tax assessor knows the Equalized Assessed Value he’ll subtract any type of exemptions you might have such as a home owner’s exemption or a senior’s exemption.  If this home is your primary residence then you’ll qualify for the home owner’s exemption of $5,500.  This means your Adjusted Equalized Value is $22,939.

Finally, the tax assessor will multiply the Adjusted Equalized Value with the Tax Rate which is adjusted every tax reassessment year.  This year, the tax rate is 10%.  When the Adjusted Equalized Value is multiplied by the tax rate ($22, 939 x 10%), the resulting number is your estimated property tax bill or $2,293.

Whew! Say that three times real fast.

At the end of the day, it’s much easier to use the first method to give you a general idea of what your taxes might be.  However, the second way is more indicative of how it’s really calculated. In order to get all of the necessary numbers you would need to call your tax assessors office and ask.

In summary, there are two ways to calculate property tax, the simple way and the complicated way.  The simple way is very easy but it’s only a close guess. On the other hand, the complicated way is far more difficult but much more accurate.

What’s My House Worth – Figuring Value in Today’s Market

What’s my house worth?  That’s a question I’m asked every time I meet with a home seller for the first time.  My immediate thought is, “Whatever a buyer is willing to spend and whatever you’re willing to sell it for.”  Of course, I would never say it like that even though it’s the best answer anyone can give.

Instead, I’ll answer with something like this, “I’m not really sure yet.  Let’s take a look at the data and let’s see what a reasonable buyer would pay based on current market conditions.” 

I’ll explain the steps I suggest to price homes correctly the first time in any market condition so you’ll never have to ask yourself the question ‘What’s My House Worth’ again.

STEP 1: IDENTIFYING IMMEDIATE COMPETITION

The first step in determining value is to see what homes are for sale in your subdivision or immediate area.  Home buyers drive by neighborhoods and subdivisions that they are interested in.  If you’re in a subdivision with six other homes for sale you need to know which ones they are and how much they’re asking.

How do you get this information? That’s easy.  Get in your car or go for a walk and see for yourself.  If there are no flyers available, take down the numbers on the For Sale sign and make a few calls.

Why is your competition important?  It’s important because a buyer that is interested in your subdivision is going to get information on all the homes for sale in your subdivision and make a decision on which ones to see.  Buyers are already starting to get an idea of home values.

STEP 2: IDENTIFYING THE REMAINING COMPETITON

I’m sorry to have to break the news but most buyers do not really care about your specific neighborhood or subdivision.  In most cases it’s the general location that is more important; not the subdivision.  For example, a buyer might want to live in your town because of the schools, or because of the proximity to major highways or transportation and there are several subdivisions to choose from.

In any event, if a buyer is interested in your city you can assume they are going to look at other neighborhoods and subdivisions as well.  These houses outside your subdivision are still your competition.

In a nutshell, any other home a buyer looks at besides yours is considered competition. 

STEP 3: IDENTIFIYING RECENTLY SOLD PROPERTIES

The first two steps talked about your competition, or other current homes for sale.  While this is extremely important it doesn’t tell us what the market value is.  Anyone can ask whatever they want for their home but it doesn’t automatically mean that’s what the market will bare.  Market value can only be determined by what has previously closed.

For example, let’s say there are six homes for sale with a price range from $200,000 to $225,000. This is your competition.  Let’s also say that four similar homes sold in the last six months with a range from $185,000 to $210,000.

Right now, the market will only bare a price of $210,000. 

But what about the guy listed at $225,000?  How is he going to get that much? 

Well, the chances are, he won’t.  Any buyer working with a realtor will find out what the market will allow before submitting an offer.  If an offer is substantially higher than $210,000 there is a good chance the home will not appraise. (Note: homes do increase in value and appraisers take that into consideration when appraising homes. A home sold at $212,000 should have little problem appraising in a growing market.)

At this point it probably doesn’t make much sense to price your home more than $210,000 unless it’s a sellers market.  A buyer will realize they’d have to pay top dollar and it might not appraise.

STEP 4:  RESEARCH MARKETING TIME

Ok, you found out there is plenty of competition and the market will only allow up to $210,000. So, you should price your home at $210,000 beating half of your competition and not worry about the whole appraisal issue, right?

Well, not quite yet.

Now it’s important to add the next element which is finding out how long it takes for a home to sell.  What if we found out that all of the homes priced over $200,000 took eight months to sell and all of the homes priced under $200,000 took less than 30 days to sell? 

Time is money.  Every month you’ll keep writing mortgage checks until your home sells. In an appreciating market it’s not so bad but in a depreciating market it’s not so good.

Do you want to price your home at $210,000 and wait an average of eight months or would you rather price it around the $200,000 range for a quicker sale.

STEP 5: PUTTING IT ALL TOGETHER

At this point we know what the competition is. We also know what the established market value determined by recently closed homes along with how long these homes were on the market.

The key is to put your self in the buyer’s shoes.  If you were a buyer and knew the top of the market is set at $210,000 would you want to pay more? Probably not. 

If you were a buyer you’d also know that you’re probably going to need to spend something very close to $200,000 because it’s the lowest price among all of the homes for sale.

Will an offer of $190,000 do the trick?  You’d be hard pressed, in a normal market, to find a seller who will take that price when the lowest competitor is above $200,000.

So what is the home worth?  In this example a seller can expect anywhere between just under $200,000 to just over $210,000 depending on if it’s a sellers or buyer’s market.

The bottom line is once you know what your competition is, what homes have sold for and how long it takes for a home to sell, you’ll have all of the information to answer the question, “what’s my home worth?”

Competitive Marketing Analysis – How Accurate Are They?

A competitive marketing analysis is a tool realtors use to help home sellers determine what their marketing price should be in today’s current market.  The good news is it’s a free service; the not so good news is how accurate they might be.

When it’s time to sell a home it’s recommended that each home seller should interview several agents before choosing the best one.  It’s during the interview that the competitive marketing analysis is done.

Logically speaking, all of the Realtors will use the same database of information (MLS) when establishing a marketing price so you’d think it would be a straight forward process with all results pointing towards the same number.  Unfortunately, this is not always the case resulting in inaccurate home prices and unusually long marketing times.

Let’s investigate the two main reasons why the competitive marketing analysis provided by realtors might not be accurate.

BUYING A LISTING

The real estate industry is one of the most competitive industries in the nation.  At this writing there are 1.2 million licensed realtors in America competing against each other for business.  How does a realtor compete with so much competition?

They ‘buy the listing’, of course!

Suppose you interview three agents.  The first and second agents say your home is worth $250,000 and $255,000 respectively and they show you evidence backing up their analysis.

However, the third one comes in brimming with confidence and says the first two realtors are absolutely crazy and at those numbers you’ll be giving your home away.  “I think your home will sell for at LEAST $275,000” and then provides new ‘evidence’. (Important point:  it’s very easy for a realtor to manipulate data to JUSTIFY a price. A justified price does not equal what a buyer is willing to pay!)

Well, gosh, what’s a home seller to do?  It’s a no-brainer.  They will go with the realtor that said they could get the most. Who wouldn’t?  Over the next 30-60 days the realtor will encourage price reductions until it’s at a value that interests potential buyers.

And that is what you call ‘buying a listing’. It’s when a realtor ‘over values’ the home in order to get the listing.  The chances are extremely high that the competitive marketing analysis is not accurate at all.  It wasn’t meant to be. The goal of the realtor is to get the listing even if it meant stretching the numbers.

LACK OF KNOWLEDGE

According to the National Association of Realtors Member Profile 2009, forty two percent of all Realtors have been in the business for less than five years.  Forty five percent of these rookies completed less than five transactions per year.

The bottom line is there is a very good chance the realtor you’re interviewing has little to no experience in performing an accurate competitive marketing analysis.  It’s not that they don’t care or have a good heart or want to do the best for you; they simply lack the knowledge to give real life accurate numbers.

IN CONCLUSION

Of course, not every realtor is inept at pricing homes.  In many cases the realtor will suggest an accurate price only to have the home seller come up with a different suggestion.  As the cliché goes, you can only lead a horse to water…

When interviewing agents the best way to get the most accurate value is to question everything the realtor says. Switch your thinking cap to a buyer instead of a seller.  Play devils advocate with the realtor.

Don’t just take their word for it. Challenge them. Question them. After all, it’s still your home and you’ll make the final decisions.

First Time Home Buyer Assistance – Can the Seller Contribute?

First time home buyer assistance programs such as the AmeriDream and Nehemiah were extremely popular over the last several years.  They were popular because the down payment provided to the buyer was considered a gift that didn’t have to be paid back and it covered the entire down payment amount.

Unfortunately, for whatever reason, these first time home buyer assistance programs were put to rest on October 1, 2008.  Whether they will be revived is yet to be seen.

So what are the first time home buyer options?  If you’re a police officer, fireman or a teacher there are programs designed specifically for you such as HUD’s (Dept of Housing and Urban Development) Good Neighbor Next Door program.  If you are not in one of these professions you can check with your local lender to see what other programs or state grants are available.

If all of these options don’t work then it’s time to consider the home seller of the property you would like to buy from.

The way the rules are today, a home seller cannot give a down payment directly to the buyer. For example, if you were going to purchase my home, I cannot write a check to you for $5,000 and then have you use that money for your down payment. In the industry it’s called a ‘RESPA’ violation. Simply put, it’s illegal.

The good news is, under certain types of loans such as an FHA loan, a seller can pay up to 6% of the buyer’s closing costs.  When you take into consideration that an FHA loan only requires a three percent down payment it’s possible, in many circumstances, that a buyer could bring very little cash to the closing, especially when the buyer receives prorated tax credits.

What closing costs can a seller pay for the buyer?  As a general rule, anything on the second page of the Settlement Statement (an itemized list of debits and credits for both the buyer and seller provided at closing) in the buyers expense column can be paid for by the seller. It used to be that a seller could not pay pre-paid mortgage insurance required by FHA. However, that rule has recently changed and now sellers can pay the pre-paid mortgage insurance.

In summary, first time home buyer assistance programs are no longer under most circumstances. However, if a buyer is securing a FHA mortgage then the seller can pay up to six percent of the loan amount to pay for the buyer’s closing costs without violating any rules or laws.  If you are need first time home buyer assistance be sure to investigate FHA loans.

Home Down Payment Assistance – Where is the Free Money?

Home down payment assistance programs are designed, in most cases, for first time home buyers.  If I could a have just a simple dime for every first time home buyer who thought the home down payment assistance meant free money then I most likely wouldn’t be writing articles.

Before October 1, 2008 there were two competing charitable organizations that made it sound like first time home buyers could receive free money for their entire down payment.  These organizations were called AmeriDream and Nehemiah.  

In a sentence, they worked by the seller making a ‘charitable donation’ to the organization in the amount of the buyer’s down payment (plus a nominal fee around $500) and the organization would in turn give the needed down payment to the buyer as a ‘gift’ that didn’t need to be paid back.

The marketing message to the buyer was, in essence, they could receive their home down payment assistance as a gift and it didn’t need to be paid back. 

But was it really ‘free money’?  Not at all.

The reality was over ninety percent of the buyer’s who received this ‘free money’ actually added the down payment amount to the purchase price.  For example, if a home seller agreed to a purchase price of $200,000 and the buyer needed $10,000 or 5% down, the buyer would simply make the offer $210,500.

In this scenario it’s a win for everyone.

The Charitable organization received $10,500.

The seller received the agreed upon net of $200,000.

The buyer gets a gift in the amount of $10,000.

The Charitable organization makes $500 profit for servicing the transaction.

So why isn’t the gift free money?  The reason is because the buyer raised the price of the home by $10,000. This means the buyer is financing $10,000 the ‘gift’. When you consider it costs about six dollars for every thousand dollars financed (at a six percent APR), the buyer’s mortgage payment will be about sixty dollars higher per month.

It doesn’t sound much like free money anymore when it’s being financed as part of the mortgage…especially when the buyer is paying interest on the mortgage, does it?

So, are there really any home down payment assistance programs that actually give free money?  The good news is there are.  However, the conditions and criteria make these programs less than popular and the areas that qualify are not the nicest.

If you are a first time home buyer and need home down payment assistance call your local lender to see if there are programs available for your needs or contact the local HUD office nearest you.