Anatomy of a Deal: How to Buy Property w/ No Money Down

Alright, so this is long overdue. This is how I, a girl with $7000+ credit card debt, $30,000+ in student loans, on a $60,000 salary bought a condo with no money down.

1) Credit Score: I had pretty decent credit - 698 to be exact. I achieved this by having 2 credit cards active for more than 24 months and NO late payments in the last 24 months as well. Yay for those annoying email reminders from creditors. Lenders prefer Credit Scores of 660+. They start to get giddy when you hit the 720 range.

2) Assets: I had some stocks worth about $12,000 set aside for me in my name in a Scottrade account that had been open for at least 4 years. I also had a 401K account from my previous company with about $11,000 worth of Ryan Homes stock. Hence, I met the requirement of having at least 6 months PITI reserves seasoned in my account for more than 2 months. For example, if my mortgage (PI) was $1600 + 320 (Taxes) + 80 (Insurance) = $2000/mo (PITI), I would need $2000 x 6 months = $12,000 reserves in an account with my name on it. Thus, I liquidated my stocks and used $8000 as an Escrow Deposit (or Good Faith Deposit) since it is customary to issue one when making a purchase offer. Usually the Escrow Deposit is 3% of the selling price.

3) Debt & Income: Well, I have a lot of it (Debt that is!). Who doesn't? To offset the Debt to Income Ratio Problem (Lenders like to see you use only 38% of your gross monthly income on your PITI + other monthly debt payments), I went Stated Income Verified Asset (SIVA) for my Loan. Hence, I was able to STATE my income so that my DTI was right at 38% exactly. It also helped that I had been employed at my company for more than 2 years and that I had the same Job Title (Project Manager) for that time period as well. Lenders like to see stable employment history (usually 2+ years). Since Project Manager is a vague job title, I could state my income without skepticism from the Lender. Other "vague" job titles that can accommodate a SIVA are: Account Executive, Sales Manager, Construction Worker, Executive Assistant, etc etc - basically positions where income can vary and which can be supported by salary.com. Now, if your Job Title was Paralegal or Nurse or Teacher, well, there are specific salary ranges for these jobs and it would be pretty difficult to justify a Teacher making $8000/mo.

So there's the Financing Part. Time to talk Real Estate. I essentially wanted a condo (since that's all I could afford in La-La Land of astronomical property values) in an up and coming area with a seller who was extremely motivated and who would offer seller concessions in the form of a credit for my non-recurring closing costs. Closing Costs are usually about 2.5% of the purchase price. They cover transactional costs (such as escrow, city and county fees, etc).

Low and behold, after 2 months of searching and waiting, I found a 2 bedroom/1 bath (2 bedroom condos can rent out for more and have better resale value than 1 and 3 bedroom condos since if you want 3 bedrooms, you might was well rent/buy a house) condo in NW Pasadena for $315,000. Found out from my Appraiser that it's value check was $355,000 (thus the property was undervalued). Made an offer of $310,000 with $8000 back for closing costs (thus the seller would net $302,000). They counter-offered with $318,000 with $8,000 back (seller net $310,000) for closing costs which I then accepted. I was adamant about obtaining closing cost credit because I wanted to limit the amount of money I would be leveraging. Basically the less money out of my pocket, the better.

After a Purchase Contract is ratified and accepted, Escrow is opened and the Buyer is in control for the next 17 days: Buyer performs the Physical Inspection + Request for Repairs, Appraisal, obtains Loan Approval, receives and looks over all Seller Disclosures and the Preliminary Title Report, and can cancel at any time within the 17 day period. After all contingencies are removed by the Buyer, the Seller is now in control. If the Buyer cancels after the contingencies are removed, the Buyer can lose his/her deposit to the Seller. Ouch, you really don't want that to happen. Thus, it's important for you and your Agent to understand the time frame and legality of a Real Estate Transaction. Thank you Captain Obvious.

Escrow usually lasts 30 days but can be extended for a variety of reasons and is negotiated between the selling and buying Agents, which can be a tedious, frustrating process since both sides have fiduciary responsibility to their own side. So, sometimes it's impossible to meet in the middle and deals fall through. Don't be discouraged though if this happens to you, it happened to me on the first condo I almost bought in Highland Park. I lost about $700 but it was well worth it to pull out of a bad investment sooner rather than later.

Anyway, hope that was educational. Til next time...Peace!

Peter's Response: Listen Up Kids

Freya,

A couple of notes. My utilities are only about 40 a month so I really pay 1050 which is still well over a third of monthly income after taxes, which leaves me with about $32 a day after my major expenses are paid; gym; cable; phone; homeowners insurance and netflix. This is not much for those of you who know New York, but I am happy as a clam - I cut most of my costs on food - eating nutri grain bars for two meals a day and eating at my staff cafeteria for lunch. I have also stopped drinking alcohol which is a total money zap. I use the money i dont spend on Zara Men and airline tickets to places like Palm Springs, Australia and Egypt. It's a fine life on 40K. One thing I am well aware of: not all of us bashed our jaws when we were, and if you did your parents just assumed it was your own fault - Not I. so hence the ability to put down such a huge down payment. That said, most people know reasonable adults who have something to contribute to you (anywhere from a 5k to a million depending on if you're Nader or someone a bit more average). Go to them with a smart, well thought business plan and a realistic estimate of what you can spend in a month. They will be happy to help if they realize how smart you are being. I am a 25 year old homeowner in Midtown Manhattan - dreams can come true - and I dont even live in a shoebox.

Holiday Season those Assets

Ha, I'm such a sucker for a play on words.

Back to bizness: Lenders also look at your Assets. Typically they want to see 6 months PITI (Principal, Interest, Taxes, Insurance) reserves in a bank account with YOUR name on it seasoned for at least 2 months.

Math Example: PITI is $2000 x 6 months = $12,000.

Now, let's be honest here. Not many of us young twenty-somethings have been able to accumulate and save $12,000 . I mean, we'd rather blow our measly savings on a much needed but completely undeserved vacay to Toronto for the Weekend just to see some Schoolmates you haven't seen since College...wait, that's just me.

Regardless, POINT IS: it doesn't necessarily have to be YOUR money, your name just has to be on the account. That means that you need to convince mommy and daddy to deposit at least $10,000 into a joint checking account with your name on it with the promise that you will not touch the money bc TADA, it's show money baby, and Lenders insist on seeing some Assets.

So this Holiday Season, spend that money Grandma Harriet puts under your pillow, take that obnoxious overly indulgent weekend trip to Aspen, but don't forget to present a logical, coherent and passionate argument to your parents that renting is for suckas and putting $10,000 into a joint checking account with your name on it is just the first step in qualifying for a Mortgage and securing and building wealth as a young, sometimes irresponsible but eagerly entrepreneurial twenty-something.

Homeowner of the Month: Peter Christenson

Who would have thunk it? Peter is on his way to building wealth, and he only makes about $40 G's a year! His credit isn't stellar, either (Sorry for blowing up your spot my dear), but here is another Home Buying Scenario that we can dissect and use as an example of financing a Real Estate Purchase AND Refinance.

So here's what we know:
Peter's Gross Income (as opposed to Net Income) is about $40,000/yr or $3,333/mo. He has a couple Trade Lines such as a Credit Card and Debit Card. Like my earlier Article on Credit Scores mentioned, Credit Bureaus like to see 3-5 Trade Lines that have been open for 24 months or more. This is why Peter's Credit Score is not in the 700s. As for monthly obligations such as Credit Card payments and/or car payments, he has close to none, besides his monthly rent. Lenders like to see that you have been renting for a continuous period, preferably for the last 2 years, and the way they Verify that is through a Verification of Rent/Mortgage form. Lenders prefer that you can handle a huge monthly obligation like paying Rent and therefore want to be able to Verify it(have your Landlord sign a document stating how much Rent you pay, blah blah). Peter had been renting for the last year and throughout college so in that aspect, he is fine.

The fourth category Lenders look at is your Assets, which Peter had plenty of. Lenders like to see 6 months of PITI m(principal, interest, taxes, and insurance) seasoned for two months in a checking/savings/stock account for 2 or more months. Lenders want to be sure that you have some extra back-up funds to pay that Mortgage if you unexpectedly get fired or injured or have a nervous breakdown and move to Nicaragua. In Peter's case, he put $300,000 down on the house so that his remaining Loan Amount was $85,000, a 22% LTV (loan to value) ratio. Because of his significant Down Payment and low LTV ratio, Lenders will have no problem issuing him a Loan. He has a 6.5% Interest Rate on his $85,000 loan amortized for 30 years which is $540/mo. His monthly Property Taxes comes to about $400/mo and his Homeowners Insurance is about $70/mo. There is also an HOA fee(homeowners association) which is an account set aside for maintenance of common grounds or payment of utilities like water and sewer in the co-op or condominium complex. This usually runs about $100-250/mo depending on the amenities of your building. Thus, Peter's total monthly outlay is about $1160/mo, which is TADA! probably how much you are paying for Rent.

Ideally,Peter should keep his Co-Op for at least 2 years. Real Estate Tax Law(thank you George Bush) states that you can claim up to $250,000 TAX FREE PROFIT from the sale of your home if you have lived in it for 2 or more years and $500,000 TAX FREE PROFIT if you have someone else on Title (like your husband or wife). If this LAW wasn't in place, you could get taxed up to 50% of the Profits! Poo Poo Uncle Sam shame on you. Thus, for Peter to re-coup his $300,000 down payment TAX FREE, he should add his mom or dad or boyfriend or best friend on Title as Joint Tenant with established Equitable Interest in the property, which takes the form of Mortgage payments. Peter, we'll chat more about that later.

BOTTOM LINE is:If you are thinking about buying property, ask yourself a couple questions: Am I planning on living here for at least 2 years? Do I have a secret Trust Fund Aunt Sherry started for me? Will my parents lend me a couple thousand bucks for a Down Payment or at least an Escrow Deposit? Have I checked my Credit Score lately? Do I have an Investment Plan or Goals? Yada Yada, you get it. This shit takes some planning. As my Uncle Bill always says, an ounce of prevention is worth 10 lbs of cure. So start taking steps now so that when you do decide to buy, you don't get screwed by the BANK.

To see Peter's full NY Times Article, please visit the web site below:

http://www.nytimes.com/2006/11/12/realestate/12hunt.html?ex=1164085200&en=7b7b1ae81763a98e&ei=5070&emc=eta1

Your Credit Score is GOLD.

When applying for a Loan, Lender's look at 4 criteria:

Income, Debt, Assets, and Credit Score.

Now, you're probably thinking: I only make $40,000 a year, I'm knee deep in credit card debt (damn you Best Buy) and the only Asset I have is my beat up 1990 Volvo Station Wagon. Don't fret. There are tons of different loan programs out there to fit various financial situations. The most important factor is, yes you guessed it, your CREDIT SCORE.

Components of a Credit Score
Generally speaking, your credit score is based upon the following criteria in order of importance:
· Payment history (this is where delinquencies will hurt you).
· Responsibility regarding credit usage (how maxed out are your accounts).
· Credit age (how long have you had your credit accounts).
· Number of credit inquiry requests.
· Credit diversity.
These quantifiable aspects, once accumulated, typically result in a number between 350 and 850. The bottom line is the higher the number, the more likely you are to pay back the loan and hence, the lower the interest rate the lender will bestow upon you.

A Closer Look at the Players Involved
There are three separate credit bureaus which keep track of your score, Experian®, TransUnion®, and Equifax. If you've heard your score referred to as a "FICO" score it's because all three bureaus use software developed by Fair Isaac Corporation. FICO is an acronym taken from that name. It's important to know most lenders look at all three scores when making a decision on your loan, since scores can and often do vary.

Here are some Credit tips to keep in mind:
1. Pay your bills in a timely manner - Paying bills on time for one month can raise your credit score as much as 20 points. Don't be a stoner about this.
2. Control the balances on your credit cards - Maxing out credit cards can lower your score as much as 70 points. So skip the $80 bartab at 4100 Bar on a Tuesday Night and head to the Roost instead.

3. Don't open new lines of credit you don't need - New accounts lower your average account age which, in turn, may lower your score as much as 10 points. Say NO to that American Apparel Credit Card.
4. No credit is bad credit - Having a few (3-5) credit cards which you manage responsibly is a good thing. Having no credit cards will reflect negatively on your credit report. So go to your local bank or credit union, find a Credit Card with ZERO APR for the first 12 months and practice some fiscal responsibility.

5. Don't start closing accounts - Closed accounts still show up on credit reports and can lower your score. If you must, cut up that card, burn it but do not close it out! Unless you consult with a Mortgage Professional (like myself) and he/she tells you to. Then you basically do whatever they tell you. Sit. Jump. Point taken.

Improving Your Score
Now that we've explored the nuts and bolts of credit scoring, let's examine how you can improve your score. If a proactive approach appeals to you, log on to http://www.annualcreditreport.com/ and obtain a free copy of your credit report. You are allowed one free report a year. Read it, get confused, call me @ (323) 823-1246 and let's get that score up to 700. Cheers.