Perhaps the biggest obstacle buying a home in San Diego is the amount of funds needed.
A down payment and closing costs on a home can easily add up to hundreds of thousands of dollars - and even the prospect of saving up enough money for closing costs on a home seems daunting.
So much so - that many potential home buyers sit on the sidelines because they believe there is no way to save up THAT much money (so they never take the first step and talk with a mortgage professional).
(Back of the napkin math - $425,000 purchase price @ 3% down = $12,7500 cash needed out of pocket for just the down payment.)
But still, closing costs alone can add multiple thousands more when you factor in lender title insurance, owner title insurance, escrow, loan processing, home insurance, credit report, appraisals, impounds, etc.
Yet there is a way to finance a home without a down payment AND closing costs coming out of YOUR pocket – if you work with a savvy mortgage professional.
This program was first introduced in the State of California back in 1993 and has helped over 45,000 people purchase homes and provided more than $50,000,000 in funding to date.
I'm calling it my special No Money Down program (not very catchy I know) and it's designed to help those in San Diego County buy a home by providing a (completely free) grant of 5% of the sales price.
With this 5% grant – you can use the funds for your down payment and/or closing costs and/or both.
How does it work?
This special program combines 2 things – a grant to cover your down payment and closing costs mixed in with a regular mortgage loan.
It’s important to understand that term “grant” clearly. A grant is not a loan. It’s a gift that does not need to be paid back to anyone at any time and can be used with both government-backed and conventional loans.
And perhaps the best part is, I walk you through the entire process – step by step.
What are the guidelines and who qualifies?
I'm glad you asked – let's dig into it.
No Money Down Grant Guidelines
This program requires the borrowers live in the property as a primary residence – but, they don’t have to be first time home buyers.
While it's not available for investment properties – there's nothing in the guidelines that says you can't buy a property undervalue, live in it as you're fixing it up over the course of several months, make on time payments, complete your project, sell, and move onto the next deal.
By the way – I speak from experience.
In addition to being a licensed real estate agent and mortgage loan originator, I've been buying and selling real estate in 5 countries since the age of 22 – and, have done over 60 mortgage loans on my own personal investments within San Diego and Riverside counties.
It’s important to note that should you sell the property later in life there is no “recapture” amount that needs to go back to the lender.
(A recapture fee is common among many first time buyer programs and others that require the grant or loan to be paid back if the buyers sell within a specific period of time, say three years - not so with this program.)
This grant is exactly what it is - “free” money that can be used towards a down payment and closing costs.
The great news is - you don’t need perfect credit for this No Money Down program. In fact, the qualifying credit score is lower than for most low down conventional loans.
The minimum credit score currently is only 620 with my lender of choice – which is what many lenders consider “average” or “fair” credit.
Keep in mind when I and the lender pulls your credit – we get a total of 3 scores.
Because we access your credit from each of the three main credit repositories, Equifax, Experian and TransUnion.
Each will provide a score based upon internal data – and, we will then use the middle score for qualifying.
More than one borrower on the loan application?
No problem, we will use the lower of the two middle scores.
Debt to Income Ratios
The maximum loan amount for San Diego County is $417,000 (which means the purchase price can be $425,000 or higher depending on your down payment) but the amount you can borrow is determined by your current monthly credit obligations, total housing obligations, and your gross monthly income for all borrowers on the loan.
There are income limits on this program – but at much higher levels than what you might be thinking.
It's designed to assist those who are facing difficulties saving up enough funds to buy a home, not for those in the upper income brackets.
The income limits are even more generous if you go for a standard conventional Fannie Mae loan which comes in at 140% of Median Household Income at $104,000 per year - or, almost $8,700 per month.
The debt to income limits are also relaxed for this program, allowing for a debt to income ratios as high as 47% for your housing debt and 57% for your total debt – known as your front end/back end ratios.
(It’s important to note here that just because debt ratios can be as high as 47%/57% it does not mean it applies to everyone – as with all loans, it's a case by case basis).
Let’s say your gross monthly income is $6,500 and you have one car payment of $400 per month. With a debt ratio of 43, guidelines ask for monthly payments to be $6,500 X .43 = $2,795. Now subtract the car payment to arrive at $2,395.
This is the amount that can be applied toward the mortgage payment.
If you borrow $300,000 with a 30 year fixed rate of 4.5 percent, the principal and interest payment is $1,520. By adding a monthly amount for tax, mortgage insurance, and hazard insurance impounds of $300, $250 and $100 per month respectively, your total house payment is $2,220 per month and total debt is $2,470 per month.
Your debt ratio for qualifying purposes is $2,470 divided by $6,500 = 38, well below maximum guidelines.
To find out how much you qualify for, you need to speak with me directly and I can provide you with a qualifying amount based upon your credit report, income, and debts.
Acceptable income for the No Money Down program asks that you be employed for at least two years and currently employed full time.
Part time income is acceptable as long as there is at least a two year history of part time employment along with a reasonable likelihood the employment will continue into the future.
Occasional income from odd jobs typically can’t be counted, again unless there’s a history.
You will be asked to provide your two most recent W2 forms and pay check stubs covering the most recent 60 days.
If you’re self-employed, you’ll be asked for your two most recent federal income tax returns for you and your business and you must have been in business for at least two years.
Your income from year to year needs to be consistent.
For example, in year one you made $78,000 and the second year, $80,000. That’s not only consistent but shows the business is growing.
Lenders will add the two together then divide by 24 (months). In this example, your monthly income for qualifying purposes is $6,583 per month. This amount meets the 115 percent median income for San Diego County requirement.
On the other hand, if year one shows $78,000 and year two $49,000, that might be a tough call and the lender will need to be convinced the lower income was a temporary dip attributed to a specific circumstance. An illness or accident for example. In such an instance, by documenting the event and showing income taxes from previous years, you can make a case for an approval.
Applying the Grant
Depending upon the type of loan selected, you’ll be asked to provide a down payment of 3%, 3.5%, 5%, or whatever amount your loan requires.
For a $425,000 sales price – your minimum down for a conventional loan is 3% ($12,750) and for an FHA loan it's 3.5% ($14,875).
If you use a conventional loan that requires the minimum 3% down – that leaves you with 2% that can be used towards closing costs.
If you go with an FHA loan that requires the minimum 3.5% down – that leaves you with 1.5% that can be used towards closing costs.
But what about the closing costs associated with the loan?
There are closing costs and I can provide you with a closing cost estimate based upon your scenario but we can use some general numbers.
I need to pull a credit report, have the house appraised, your loan processed, and charge a loan origination fee.
This amount would be around $7,500 using a $425,000 sales price.
Non-lender charges could add up to around $10,000 for an approximate total of $17,500.
The $17,500 is a good estimate on what you’ll need to cover closing costs, leaving you with $3,350 from the free 5% grant amount of $20,850.
Okay, so how about the other $10,500 you will need to cover the down payment and closing costs?
Structure your offer correctly and have the seller's contribute $10,500 to cover your closing costs when we write up your Residential Purchase Agreement.
Sellers are allowed to contribute an amount ranging from 3% to 6% percent of the sales price, depending upon the type of loan you go with.
Say you’re using an FHA loan. The seller can contribute up to 6% of the sales price, or in this example, $25,500.
But you don’t need that much because your needed down payment and closing cost money (besides the grant) is $10,500.
You won’t get to take home the difference from escrow – but, you can get a mortgage with no money down, no closing costs, and with the seller contributing any amount not covered by the grant.
Okay, so you've read this far and are intrigued.
You understand there's a State of California program that will give you 5% of FREE grant money to use towards your next San Diego purchase – potentially up to $20,850.
You want to use this towards your down payment, closing costs, and have your offer structured properly so the seller will contribute anything else needed as part of your offer.
You will have a credit report fee, appraisal fee, and home inspection fee to pay upfront – but because you're working with myself I will gladly credit these back to you at the close of escrow to truly make this a No Money Down deal.
What should you do next?
My suggestion – contact me.
Why not get started now? Please text or call me at (760) 297-4539
Your No Money Down Expert,