Three ways to buy Grandma’s House with no money down, even though it’s in a remote location.
1. Gift of Equity. If it really is Grandma’s house you can use a gift of equity. The buyer and Seller MUST be close relatives; father, mother, sibling, grandparent. You will write the contract to show the full purchase price. Next, instead of the amount of the earnest money deposit, you will show about 25% of the total price as a Gift of Equity. This will allow you escape mortgage insurance since your loan will be less than 80% of the purchase price. You will want to include a 3% seller concession in your contract as well, which will likely cover most, if not all, of your closing costs. The big assumption here is that Grandma has at least 25% equity in her home that she is willing to part with for your benefit. The parameters will work for a conventional loan.
2. USDA Loan. That’s right, the people that inspect your steaks also guarantee mortgages for home owners in Rural America. This particular loan program allows the buyer to borrower 100% of the purchase price PLUS up to a 6% Seller concession. At the time of this post there is a .5% Mortgage insurance premium which is minimal. As a comparison FHA uses a factor 1.15% and most high LTV conventional PMI uses a factor of .94%. The “catch” on the USDA loan is that it must be “rural” according to USDA and the borrower can’t earn more than 84,000 per year for a family of four. Very few Banks and only a handful of Mortgage Brokers offer the program, if you contact USDA they will give you a list. Of course Victory Funding is on it!
3. Land contract. If it’s not YOUR Grandma’s house, and you make too much money or you don’t qualify for some reason, don’t give up! You can still put a deal together as a Land Contract purchase. The contract will include the purchase price and terms, which can include NO Down payment! While you really don’t have any lender guidelines to worry about at the purchase, there are some things you will have to do to be able to refinance this in the future. First, you should file either the Land Contract OR a Memorandum of Contract at the County Clerk’s office to memorialize the deal. Most lenders recognize a land contract as a sale and will allow you to refinance and roll in your closing costs, but some require that you have hard evidence that it was a legitimate deal and not a back dated paper deal to escape the down payment requirements. I also recommend that you pay a third party in order to protect both parties if there is underlying financing.
I think its important to note that any time you embark on a real estate adventure you should work with qualified professionals who understand, not only the legalities, but the ramifications of any terms on the lending guidelines that will impact your exit strategy.
I’m always happy to help structure your transaction so give me a call. Check out the websites on the right and get moving on Grandma’s House!! It could be yours!
