1820404In the mid 1970’s, when I bought my first home I was 21 years old. I was working for my father at the family camera store. Dad told me that I could not look at houses until I had saved enough for the required 20 % down payment. A nice house in Midland cost around $20,000. So when I had 4,000 Dad called his Realtor® friend and I went looking at homes.

Today, things are different. Banks and the US government are promoting “Zero Down” loan programs. They are reaching out to buyers with the idea that they will not have to have any money to purchase a home. So how does that work? When I meet with a seller we talk about raising the asking price slightly higher than what they really think they are willing to sell their home. Sellers want some room to negotiate with the buyer. Recently in Cadillac the average reduction from the finally asking price has been 5%. So if the seller is asking $100,000 then they should expect to receive 95,000 from a cash buyer.

With a zero down buyer the transaction will be a little different. The buyer will offer the seller the full asking price ($100,000) and the buyer will ask the seller to “Contribute up to 6% of the selling price for the buyer’s closing costs, fees and prepaids.” At the closing, the title company will subtract $6,000 from the seller proceeds and use the 6,000 for the buyer’s costs (appraisal, loan origination Rural Development guarantee, house insurance and property tax escrow account). So the seller will receive $100,000 less 6,000 and then, less the customary selling costs (real estate commission, transfer tax and title insurance).

I recently completed a transaction involving a $69,900 home with a US government guaranteed loan (Rural Development – RD Loan). Because the buyer did not have a down payment, the seller agreed to pay 6% of the buyer’s costs. A breakdown of the buyer’s closing fees are noted below. His closing fees were $7,294 of which the seller paid $4194 (6%) leaving $3,100 to be added to his mortgage. His mortgage started at $73,000 for a 69 thousand dollar home. But, he was better off than renting. His payment is less AND he is building equity in his home. He also has the pride and freedom of ownership. If he wants to paint the living room he can, without getting the landlords permission.

1/4 Point $182.50
Administration fee $395.00
Origination fee $730.00
Processing fee $395.00
Underwriting fee $800.00
Prepaid interest $129.76
Appraisal fee $385.00
Credit report $29.17
Flood certification $16.00
RD loan guarantee $2,007.50
MCC fee (USDA) $730.00
Escrow: House insurance $192.54
Title insurance $386.85
Title Company fee $150.00
Tax certification $50.00
Recording fees courthouse $63.00
House insurance (Current year) $723.84
Prop tax Adjustment -$72.16
Sub-Total $7,294.00
less sellers’ contribution -$4,194.00
Added to mortgage $3,100.00
Purchase Price $69,900.00
MORTGAGE $73,000.00