How to buy a house using little cash

If you are "cash challenged" or "credit challenged," don't let that stop you from buying a house or condominium in the current buyer's market. Home sellers and home builders, as well as their real estate agents, have never been more eager to sell you a home.

Forget what you read or heard about the "subprime" mortgage market. That's a very small fraction of the home sales market. Don't let it affect your desire to buy a home.

CONSIDER A TRADITIONAL MORTGAGE. If you have good income and a FICO (Fair Isaac Corp.) score over 620, you can probably qualify for a conventional mortgage.

Qualified veterans can obtain no-down-payment VA mortgages with minimal closing costs. PMI (private mortgage insurance) home loans for 90 percent, 95 percent and even 100 percent are grabbing a rising share of the mortgage market. FHA is talking with Congress about eliminating its 3 percent down-payment rule and raising its maximum mortgage limit.

But suppose you aren't interested in those mortgages, perhaps because you don't have good enough credit. You can still buy for a low or no down payment by avoiding the need for a new mortgage from a traditional lender.

WHY BUY FOR NO DOWN PAYMENT? The definition of "nothing down" does not mean the home seller won't receive any cash. In fact, many nothing-down sellers receive all or most of their equity in cash when the sale closes. Nothing-down home purchases allow buyers to start building equity by taking advantage of the current buyer's market.

Nothing down simply means the home buyer pays little or no cash from his or her pocket. The cash in the transaction is borrowed, such as on an unsecured credit line from your bank, credit union, relative, or even your credit card.

Many credit cards now offer low 1 or 2 percent interest rates for up to 12 months by just writing a check. A few days ago, along with my Citibank credit card bill, I received their offer for zero percent interest just by writing a check.

FIVE NO-DOWN-PAYMENT FORMULAS. The major secret of buying a home with little or no cash is to purchase from a highly motivated seller. I've learned to always ask, "Why are you selling this lovely house?" Sometimes it's a stretch to use the word "lovely" if the place is really "el dumpo."

Signals of strong seller motivation to sell include retirement, unemployment, job transfer, divorce, pending foreclosure, drug or alcohol problems, birth, death or illness in the family, rental property negative cash flow, management problems, partnership break-up, probate sale, tax or debt problems, and moving up or down to a larger or smaller home. Here are the five best and easiest ways to buy from motivated home sellers for little or no cash:

1. BUY FOR NO DOWN PAYMENT "SUBJECT TO" THE EXISTING MORTGAGE. If a home has a large first mortgage, it is often possible for the buyer to purchase simply by taking over payments on that loan and giving the seller a second mortgage for his equity. Or the seller might need some "walking money," such as $5,000 or $10,000 cash.

This is called a "subject to" sale. That means the buyer does not formally assume the mortgage obligation but must make the monthly payments or lose the property by foreclosure.

Won't this violate the mortgage due-on-sale clause? Yes. But it is not illegal or unethical. Especially in today's depressed home-sale market in many cities, a mortgage lender would be crazy to call a mortgage due in full if the payments are being paid on time. However, if the lender should demand full payment, "subject to" buyers can refinance with another lender.

2. PURCHASE FOR NO DOWN PAYMENT BY ASSUMING THE EXISTING MORTGAGE. When a home seller refuses to sell "subject to" the existing mortgage or the mortgage lender demands assuming the mortgage, a closely related formula is to "assume" the existing mortgage. If the seller has a large equity, ask the seller to carry back a second mortgage to fill that finance gap.

A mortgage assumption means the home buyer formally takes over the loan obligation with the lender's approval. However, most lenders refuse to release the original borrower from that loan obligation even if the buyer is well-qualified for the loan assumption.

Some lenders charge assumption fees of $500 to $1,000, even as much as 1 percent of the mortgage balance. But this is usually far cheaper and easier than obtaining a new mortgage.

3. BUY WITH A "RENT TO OWN" LEASE-OPTION. This is my personal favorite low- and no-cash method of acquiring real estate, which I've used for more than 25 years. In fact, I used this method to buy my current residence when I was "cash challenged."

The basic idea is to control the property and its benefits by leasing it with an option to purchase. Lease-options work well for both buyers and sellers.

A lease-option is a combination rental and finance method. It works especially well for "cash challenged" and "credit challenged" home buyers who need a year or two to clean up their finances and credit situations.

For buyers, the best lease-option benefits are the monthly rent credit toward the purchase price and locking in the option purchase price. For sellers, the big benefits are finding a prospective buyer in a slow market and receiving monthly rent income to pay the mortgage, property taxes and other expenses.

4. BORROW THE DOWN PAYMENT. Thousands of home buyers get their down payments from the world's easiest lender, "The Bank of Mom and Dad." That's what I did years ago when I bought my first property.

Being a typical first-time home buyer, I had good income but little savings. When I told my mom and dad about the property I had in mind, a two-bedroom house plus two rental units to pay most of the expenses, they gladly loaned me the down payment I needed. Then I bought "subject to" the existing mortgage.

Yes, about 10 years later I paid off that loan from my parents. Since they refused to accept interest from me, I was in no hurry to repay that loan.

5. TRADE "TOYS" FOR YOUR DOWN PAYMENT. If you own any "toys" that you really don't need, they can be traded as the down payment for a house or condo. Perhaps you own a boat or RV that the motivated seller of the home you want to buy might gladly accept as a down payment.

For example, when I was selling a rental house a few years ago on a lease-option, I recall an especially motivated couple who wanted that property. But they didn't have the $10,000 required to move in (first month's rent, plus the option money). I noticed they drove up in a nice-looking Porsche. So I suggested they trade the Porsche to me as their move-in money. The wife liked the idea. But the husband couldn't bring himself to part with his beloved toy so we didn't make a deal.

SUMMARY: The current home buyer's market is a great time to acquire a house or condominium for little or no upfront cash down payment. Depending on the buyer's and seller's motivations, there are many ways to create no-down-payment sales terms.