Real Estate Information:
100% Mortgage Financing and a Case For Zero Down Home Loans
Real estate in many parts of the country has recently seen many sellers agents and sellers themselves become uncomfortable with modern lending practices, most notably the 100% financing loans, and as a result are less confident accepting an offer from such a buyer than we feel is really justifiable. We are going to attempt to inform and ultimately persuade you that there really is no unique risk to a zero down buyer and that they are in many cases the best and most solid buyers available! But first, let’s dismiss some of the most common myths associated with zero down home buyers.
Myth #1 Zero down buyers are risky and can’t close if the house doesn’t appraise for full value.
Would you pay more for a house than what it is really worth? Of course not, and neither would we. The truth is that people aren’t stupid and having a house fail to appraise is a red flag to anyone! Many argue that in the event a home does not appraise at full price, a buyer with some money down will be able to make up the difference with their down payment. While this is true in theory, the million-dollar question is whether or not they are willing to do this. The vast majority of the time the answer is no. Cash and large down buyers didn’t get to be cash and large down buyers because they are foolish. They’ll simply renegotiate to the appraised value or simply move on. The idea of buyers making up the difference for under appraised property is wishful thinking and doesn’t pass any common sense litmus test.
Myth #2 Zero down buyers lose nothing if they don’t close escrow.
Zero down buyers have as much to lose as anybody! Being a zero down buyer doesn’t mean you don’t put down a deposit. A deposit is what is at risk if a buyer decides not to close escrow. The truth is that EVERY buyer has nothing to lose prior to the end of a (normally 17 day) contingency period. After the release of contingencies, the amount of the deposit is what determines how much a buyer has at stake not the amount of their down payment.
Myth #3 Zero down buyers may not be able to get the loan.
This can happen with ANY buyer. People ruin their credit scores, work with incompetent and deceitful lenders, and do all sorts of things to shoot themselves in the foot. If you are an agent or homeowner reading this, you can rest assured that our buyer has been qualified with one of our approved lenders with a track record of standing behind their pre-approval letters and obtaining the loans that they quote. Overall, the failure to qualify for a home loan is not a problem unique to zero down buyers but rather people in general.
Myth #4 Zero down buyers do not have any money, and don’t deserve a house.
This is more of a conviction than anything else but it is still factually incorrect. Many people who could buy the subject property many times over in cash simply choose not to because they are financially savvy and would rather tie up their banker’s money than tie up their own. This is called leverage and is not relevant to a seller. Some buyers like to stretch themselves thin and others don’t. It’s their prerogative and they are the ones who live with the results. Unless the seller is personally carrying back the loan, they shouldn’t concern themselves whether or not the buyer will be able to make the monthly payments. Instead they should focus on whether they will receive a check at the close of escrow!
Recap
All buyers carry a certain amount of risk and any buyer may “back out” of a transaction prior to the end of the contingency period. By any buyer, we mean even those with a large down payment! There just is not any proven correlation between the size of a down payment and the willingness of a buyer to close escrow. The reasoning is pretty straightforward. People change their minds! People with money change their minds, and people without a lot of money also change their minds.
Recommendation
The mindset of the buyer is far more important than the amount of money down in determining who will close escrow. The reason we say 100% buyers are some of the best buyers is because their mindset is very attractive to a seller. This mindset is a result of the misconceptions that other sellers have placed on them as zero down buyers. Without breaking deeply into the psychology of the situation, the bottom line is that zero down buyers have probably heard rejection after rejection and now just want a house. They would be thankful and thrilled just to have somebody say YES to them and are often less likely to do (or not do) anything during the escrow period that could jeopardize them getting the house. It is for these reasons that zero down buyers are GREAT buyers and why we also encourage home sellers to say YES to them.
About the Author:
Todd Foust is the chief marketing executive for the FOUST Team at C21 Discovery; one of the top-selling real estate teams in Southern California. He specializes in Orange and Los Angeles Counties and operates one of the area’s most informative real estate websites. To contact him or learn more about Orange County real estate, please visit www.FOUSTonline.com.
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