Author Topic: Advice on buying a home with no down payment  (Read 14367 times)

Nate77

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Advice on buying a home with no down payment
« on: February 17, 2012, 09:26:53 AM »
I would love to hear advice regarding buying a home with no down payment.  I would be a first time home buyer and am curious to know if there are any assistance programs or tax credits available.  What are the disadvantages of no down payment besides having to pay for PMI (?) Insurance and I'm guessing I wouldn't get as good a rate as if I had my 20% down payment.
« Last Edit: February 17, 2012, 09:29:33 AM by Nate77 »

Physics

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Re: Advice on buying a home with no down payment
« Reply #1 on: February 17, 2012, 09:29:58 AM »
There are many opinions on this and I have a pretty strong one, so don't take this the wrong way.

My advice is: don't even consider it.  If you _need_ a zero-down arrangement, then you cannot afford the house, full stop.  If you could buy the house and taking on more leveraged debt is an investment strategy, then I suppose that is different story.

Nate77

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Re: Advice on buying a home with no down payment
« Reply #2 on: February 17, 2012, 09:33:35 AM »
That's what Dave Ramsey would say as well.  My monthly payment (including PMI, property tax) would be the same as I'm paying in rent.  I know there are maintenance costs to figure into that as well.  I hate sending that rent check every month knowing I'll never see that money again.

Physics

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Re: Advice on buying a home with no down payment
« Reply #3 on: February 17, 2012, 09:42:31 AM »
My monthly payment (including PMI, property tax) would be the same as I'm paying in rent.

I guess it is really a question of timing.  Though, I do cringe a bit when "I can meet the monthly payment" is an argument for whether something is affordable or not.

That said, you have to live somewhere, so I think it is more of a timing issue.  If I were you, I'd try to go super-mustachian mode for 6 months to a year and see how much money I could accrue to try to avoid all of the annoying extra PMI stuff.  Of course there is a risk that housing prices will increase during that time, but that is hard to predict with any level of accuracy.

Is there a particular house you are looking at that is on the market currently?

Nate77

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Re: Advice on buying a home with no down payment
« Reply #4 on: February 17, 2012, 09:47:04 AM »
No particular house I'm set on.  I've been browsing the listings to see what is available in my price range.

velocistar237

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Re: Advice on buying a home with no down payment
« Reply #5 on: February 17, 2012, 09:59:36 AM »
Nate77,

Run the numbers comparing buying now vs. saving for a down payment, assuming an increase in house prices and interest rates, factoring in the rent you'd pay in the meantime. I'm guessing you would find out that it's better to wait in most realistic scenarios.

PMI is like high-interest debt. For a zero-down loan (if you can even find one), or even 10% down, it's equivalent to something like 10-15% interest on the remainder of the first 20%. Once we figured this out, we paid our loan down to 80% LTV as fast as we could.

http://www.westga.edu/~bquest/1997/costof.html

One option is to buy with 5% down in order to lock in the price and interest rate at today's numbers, with the intention of paying down your mortgage ASAP to get PMI removed. Only do this if you know you'll have the cash flow to do it. Note that you can't do this with FHA loans, since they have a 5-year minimum PMI period.

To sum up, I side with Physics.

Mike Key

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Re: Advice on buying a home with no down payment
« Reply #6 on: February 17, 2012, 10:11:56 AM »
Are you already pre-qualified? Three of the lenders I've spoken too won't even talk to you if you don't have a down payment. So I'm curious who is going to do that. That's practically a big reason why the housing bubble happened, is tax credits and programs to put people in houses with no money down who really had no business owning to start with.

I don't always agree with everything Ramsey has to say. Particularly concerning credit, and leveraged risk. But I do agree with him on your first home, you should have a down payment.

The I can afford the payments line is the same moronic statement people use to justify buying depreciating assets (AKA Big Black SUVs) that most people usually end up paying significantly more for because of the interest.

Where I live, it's cheaper to own than rent. But I haven't finished figuring out the numbers if it is worthwhile for me to own, because I have student loans to deal with.

So my only other question would be, what's your credit/debt history? Are you in debt? Are you living paycheck to paycheck? Do you have savings, etc?

Unless you are trying to do the no money down rental real estate game?

Nate77

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Re: Advice on buying a home with no down payment
« Reply #7 on: February 17, 2012, 11:12:28 AM »
Thanks for all of the comments so far!  You've enforced my original notion which was to wait until I get a down payment saved.  I do also have some student loan debt which I'll get paid off first as well.

arebelspy

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Re: Advice on buying a home with no down payment
« Reply #8 on: February 17, 2012, 11:16:16 AM »
Are you already pre-qualified? Three of the lenders I've spoken too won't even talk to you if you don't have a down payment.

FHA is like 3.5%-5% down nowdays.  Not quite the same as 0% down, but close.

EDIT: That being said, I'd personally save up at least a 10-20% down payment, then do the lowest down possible for financial strategy reasons.
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Re: Advice on buying a home with no down payment
« Reply #9 on: February 17, 2012, 10:33:42 PM »
If you fail to put 20% down you will lock yourself into the house for a long period of time.  I chose not to so that I could invest the money in other place.  I would not do so again.

Putting down 20% will make you focus more making the correct decision because a large chunk of your own money will be tied up in the house.

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Re: Advice on buying a home with no down payment
« Reply #10 on: February 20, 2012, 09:02:29 PM »
I second everyone's "wait and save the down payment" remarks. Also second your "hate writing that huge rent check" statement!

Many moons ago I was in a 1/1 apartment in an expensive metro area living nearly paycheck to paycheck, certainly not getting ahead. Finally, I bit the bullet and rented a room (lots of boxes in storage... realized how much I really didn't need) with two other roommates in a town house for over two years and it worked out incredibly well for me. So in addition to waiting on a home purchase and paying down your student loans debts, is it possible for you to down grade your rental situation? Put some things in storage and get a smaller apartment or rent a room/basement/trailer to save even more money towards these two goals?

foodguy

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Re: Advice on buying a home with no down payment
« Reply #11 on: February 20, 2012, 10:13:09 PM »
I bought with only 5% down, and despite having perfect credit and a substantial income for my area, it was simply the biggest financial mistake I've made thus far in my life.  I thought I had caught prices at near bottom.  I did extensive research on the property and bought after similar properties had fallen 40%.  The sellers walked away from closing with less than $1000 (granted I don't know what they put down, but that's how leveraged they were).  I then watched the value drop another 20-30% from my purchase price.  Had I put 10%, 15%, or 20% down, my PMI would be much less or zero, and my current financial situation with regards to the mortgage and home value would be much better.  As it stands, I owe about what it would sell for, but that doesn't account for brokers fees, etc, which would then put me underwater.  Had I put 20% down, I wouldn't have an issue and wouldn't be having to kick in extra principal to keep my head above water.

Do NOT do zero down.  At minimum do 10%, but you'll be much better off if you do 20%.

Again, DO NOT DO ZERO DOWN!

Mike Key

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Re: Advice on buying a home with no down payment
« Reply #12 on: February 21, 2012, 05:41:47 AM »
I bought with only 5% down, and despite having perfect credit and a substantial income for my area, it was simply the biggest financial mistake I've made thus far in my life.  I thought I had caught prices at near bottom.  I did extensive research on the property and bought after similar properties had fallen 40%.  The sellers walked away from closing with less than $1000 (granted I don't know what they put down, but that's how leveraged they were).  I then watched the value drop another 20-30% from my purchase price.  Had I put 10%, 15%, or 20% down, my PMI would be much less or zero, and my current financial situation with regards to the mortgage and home value would be much better.  As it stands, I owe about what it would sell for, but that doesn't account for brokers fees, etc, which would then put me underwater.  Had I put 20% down, I wouldn't have an issue and wouldn't be having to kick in extra principal to keep my head above water.

Do NOT do zero down.  At minimum do 10%, but you'll be much better off if you do 20%.

Again, DO NOT DO ZERO DOWN!

Sorry to hear about that foodguy. Thanks for sharing man though man. We can all learn from that experience.


edit* I was mistaken. It is inflation!
« Last Edit: February 21, 2012, 09:32:11 AM by Mike Key »

arebelspy

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Re: Advice on buying a home with no down payment
« Reply #13 on: February 21, 2012, 08:27:40 AM »
I bought with only 5% down, and despite having perfect credit and a substantial income for my area, it was simply the biggest financial mistake I've made thus far in my life.  I thought I had caught prices at near bottom.  I did extensive research on the property and bought after similar properties had fallen 40%.  The sellers walked away from closing with less than $1000 (granted I don't know what they put down, but that's how leveraged they were).  I then watched the value drop another 20-30% from my purchase price.  Had I put 10%, 15%, or 20% down, my PMI would be much less or zero, and my current financial situation with regards to the mortgage and home value would be much better.  As it stands, I owe about what it would sell for, but that doesn't account for brokers fees, etc, which would then put me underwater.  Had I put 20% down, I wouldn't have an issue and wouldn't be having to kick in extra principal to keep my head above water.

Do NOT do zero down.  At minimum do 10%, but you'll be much better off if you do 20%.

Again, DO NOT DO ZERO DOWN!

Ummmm.. but by not putting that extra 15% down (to go from 5% to 20%) you kept that money.  So you could invest it, presumably, in something other than house equity.  If you wanted, you could sell those investments and put it into the house, and it'd be exactly like you did 20% down.

Like I said above, if you put a low amount down, it should be for financially strategic reasons.  If you didn't have the money, that's one thing.  But if you merely say "I should have put 20% down instead of 5% down," I disagree, because you're just trading one investment for another, and if you think putting it in the house is better.... put 100% down, or start aggressively paying off that mortgage.  Since you are in the situation you are in, I'm assuming you didn't do that.

Cash is fungible.  If you have enough for 20% down, but choose to do 5, then later it drops like it did on you, you can reallocate to pay it down, and it's just like you put 20% down to begin with (besides having to pay PMI, but also earning a return on the money in the meantime).

I'm sorry you're in a situation where you're unhappy.  But honestly, I would count yourself very lucky.  To have only put 5% down yet still be able to sell the house for what you got it for (and only be underwater the closing costs/selling costs)... many would kill for that situation. A lot are underwater 6 figures, easy.


Which traditionally was 1% a year.

No, that's low.  Not as bad as the people stating it was 5+% a year, but not correct either.  Long term, housing matches inflation.  For a number of reasons, houses merely rise with inflation and remains the same in today's dollars (aside from bubbles - we're talking long term).  If you'd like to discuss more, feel free to start another thread and I'll defend my statement.
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chrissyo

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Re: Advice on buying a home with no down payment
« Reply #14 on: February 21, 2012, 10:14:54 AM »
Another vote here for "wait and save". I totally agree with the above statement about having no down payment saved means you are no tin a financial position to buy. There are so many potential issues in a home you need to have the financial resources and/or experience to handle, and it sounds like buying now would really be jumping the gun in your scenario. I would highly recommend saving *at least* 10% before you consider it.

Even if the mortgage payment is what you are paying in rent now, if you have previously been unable to save at that rent level, you do not want to leave yourself in the position of having taken on a big chunk of debt with zero equity in it while  only really just scraping by.

It's also highly unlikely that prices will jump soon - and certainly not at the same rate they dropped - so the current deals you can get on buying houses should be around at least a little while longer, giving you time to save up a decent down payment and to get in the habit of stashing away excess cash each month.

foodguy

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Re: Advice on buying a home with no down payment
« Reply #15 on: February 21, 2012, 04:56:42 PM »
[Ummmm.. but by not putting that extra 15% down (to go from 5% to 20%) you kept that money.  So you could invest it, presumably, in something other than house equity.  If you wanted, you could sell those investments and put it into the house, and it'd be exactly like you did 20% down.

Like I said above, if you put a low amount down, it should be for financially strategic reasons.  If you didn't have the money, that's one thing.  But if you merely say "I should have put 20% down instead of 5% down," I disagree, because you're just trading one investment for another, and if you think putting it in the house is better.... put 100% down, or start aggressively paying off that mortgage.  Since you are in the situation you are in, I'm assuming you didn't do that.

I did have enough to put down 20%, but would have completely wiped my emergency account, which would have been dumb.

Your logic to put only 5% down and invest the rest discounts the fact that your true carrying costs of the mortgage go up via PMI.  It also discounts the comfort level of the individual.  Some people are comfortable to be leveraged to the max, so financing 95% or more of their house is no big deal.  Hell, some people leverage with no assets to back it up via credit card debt.  There are situations unforseen in the future that become much more complicated when you are underwater on a home.  Moving, upgrading, downsizing, job transfers, kids, significant others, neighbors... With the benefit of looking back, I'd rather have it paid for in full, or put as much down as possible and have more cash flow each month for other items.

Quote
Cash is fungible.  If you have enough for 20% down, but choose to do 5, then later it drops like it did on you, you can reallocate to pay it down, and it's just like you put 20% down to begin with (besides having to pay PMI, but also earning a return on the money in the meantime).

But then you are still stuck paying PMI even if you do kick in the extra money.  $100k home, put $5k down.  House drops to a value of $80k.  You kick in the other $15k, which 5 years later at 8% return is now ~$22k.  Loan is now ~$65k (100 - 5 downpayment - 22 extra cash - 8 amortization) and house is $80k.  You're still stuck paying PMI, as an appraisal won't show 20% equity.  This PMI rate is still based on the original 95% LTV loan, so the premium doesn't decrease.  The removal of PMI is complicated and varies from state to state.  In my state, you must show 20% CURRENT equity, based on a current appraisal.  And our little scenario has made some generous assumptions.  8% on your "extra" cash.  What if the market dives, or you only get 5% ROR?  House only dropped 20%.  What about 25%?  30%?  50% as has been experienced in some areas?

Do you think we've hit the bottom of the market?  How much faith do you put in the WSJ?  CNBC?  Your politicians?

Quote
I'm sorry you're in a situation where you're unhappy.  But honestly, I would count yourself very lucky.

Don't get me wrong, I'm not complaining.  And at no point in my post did I say I was unhappy.  I am fortunate to be able to dig my way out of this and don't need your assistance to point that out.  At the time I sought out and was approved for a loan much higher than the point at which I purchased, and could have been approved for higher than that.  In short, I left my self a way out if things went south.  Things did not turn out for the best and I'm implementing my way out.  The downside is my long-term net worth.

Again, with the benefit of hindsight, I think anyone would say it was not a very intelligent decision to buy with so little down.  Had I taken a different path, my personal balance sheet would be much better off.  And I would think that the OP would benefit following a path different than mine.

arebelspy

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Re: Advice on buying a home with no down payment
« Reply #16 on: February 21, 2012, 06:06:50 PM »
Yes, obviously PMI would have to be calculated in, as all fees, etc.

We'll have to agree to disagree then, because I would argue that merely the fact that your house went down in value and had you waited to buy does not mean it was the wrong move, while you would disagree.  That's fine.
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Mike Key

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Re: Advice on buying a home with no down payment
« Reply #17 on: February 22, 2012, 05:47:14 AM »
I did have enough to put down 20%, but would have completely wiped my emergency account, which would have been dumb.

Why would it have been dumb? You emergency stash would of just transfered to home equity line of credit, which even MMM himself states is perfectly fine for an emergency stash. Unless you just like having it liquid in a bank account.

arebelspy

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Re: Advice on buying a home with no down payment
« Reply #18 on: February 22, 2012, 07:30:00 AM »
Why would it have been dumb? You emergency stash would of just transfered to home equity line of credit, which even MMM himself states is perfectly fine for an emergency stash. Unless you just like having it liquid in a bank account.

No, it would have been transferred into equity, not a HELOC.  You can open a HELOC against equity, but if you just bought a house and put 20% down, no lender will give you a HELOC against that.  Most HELOCs only go to 80% LOC.

You do need to have extra cash when buying a house - stuff will crop up.

One rental I bought had the water heater break two days after the tenants moved in (was working fine before that, home inspection verified and it worked for them for two days, then started spitting water all over the floor).
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Scuba Stache

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Re: Advice on buying a home with no down payment
« Reply #19 on: February 23, 2012, 11:04:15 AM »
I hate sending that rent check every month knowing I'll never see that money again.
This was my thinking exactly when I bought my house 2 years ago(pre MMM) with FHA 3.5% down. Now I realize that my 1400/month payment has ~250 actually going to principle and the rest is still being thrown away to interest/PMI/taxes/insurance. I would have been much better renting for a few years and have a 20% down payment.

Mike Key

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Re: Advice on buying a home with no down payment
« Reply #20 on: February 23, 2012, 12:51:29 PM »
I stand corrected and informed. Now I need to remember to keep my emergency stash when buying a home.

velocistar237

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Re: Advice on buying a home with no down payment
« Reply #21 on: February 23, 2012, 01:06:49 PM »
I hate sending that rent check every month knowing I'll never see that money again.
This was my thinking exactly when I bought my house 2 years ago(pre MMM) with FHA 3.5% down. Now I realize that my 1400/month payment has ~250 actually going to principle and the rest is still being thrown away to interest/PMI/taxes/insurance. I would have been much better renting for a few years and have a 20% down payment.

Exactly. The comparison isn't straightforward. There's principal and interest, but then there are closing costs, property taxes, insurance, PMI, upkeep, upgrades, lost investment returns from equity locked away in the property, tax issues, increased liability, etc., not to mention you have to spend time fixing things, it costs a lot to sell and move, your property value could change, etc.

Here's the best perspective I've seen on rent vs. buy. It's both financial and personal.

arebelspy

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Re: Advice on buying a home with no down payment
« Reply #22 on: February 23, 2012, 01:55:59 PM »

Here's the best perspective I've seen on rent vs. buy. It's both financial and personal.

That is a good site, thanks for the link!

One of my favorites (when referring friends who are torn on the decision) is the New York Times' Rent vs. Buy Calculator:
http://www.nytimes.com/interactive/business/buy-rent-calculator.html

It has fun graphs to play with!  :D
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warped

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Re: Advice on buying a home with no down payment
« Reply #23 on: February 23, 2012, 04:20:49 PM »
One other factor to consider: the act of saving the 20% is quite useful; especially if you have a spouse.

"In theory I have a budget that should let me save money" is much, much, different than, "I've saved $40,000".

How much to put down when you have the cash can be debated/calculated, but learning to save before you have a house is better than trying to learn to save after you've bought one....

JMHO

sirspiffy

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Re: Advice on buying a home with no down payment
« Reply #24 on: March 06, 2012, 03:18:31 PM »
There are a number of creative purchase strategies available to you.

1. Private lenders could give you a secondary loan.  A secondary note, at the right price, could help you avoid costly PMI.  Many lending organization have issues with compound financing though.  You may have to seek out alternative financiers, or sell an option and have that option default to a note.  This makes the loan a sale on paper. 

2. Owner Financing  basically the same thing as a Private lender except its the current owner of the property.  Typically Rates and terms are more flexible with these individuals because they are less sophisticated and have fewer requirements than other private lenders.
 
3. Mortgage assumption where you assume the current mortgage.  Not the most widely used strategy right now as some mortgages are underwater.  Basically you start paying the mortgage of the other person.  Typically inheritance properties that the owner doesn't care about that were purchased before the boom and bust would be what you're looking for. 

4.  The 1031 tax free exchange might be an option as well if you have other assets.  Basically you aren't selling but exchanging property.  Lets say you have an antique car collection and meet a man with a home he doesn't want.  You trade your pink slips for his deed and fill out the necessary paper work. 

5.  Don't forget to hit up the family for a loan, make sure you make it legal and put some paperwork behind it. 

Just remember, an owner occupied single family home is not generally considered an investment.  It can be but capital gains on sfh require a lot of hard work, and market knowledge to be exercised.  the longer you wait the smaller the returns get because the holding costs just murder the capital gains.  Because of frequent expenses.  Most people move withing 7-10 years.  At that rate a home is an expense and expenses need to be minimized. 

Consider a profitable multi-family unit for a zero down purchase if you're young with more credit than cash or high leverage is your thing.  Get on loopnet.com and see what's in your hood.  That way you can get on the other side of that rent check and have your first foray into passive cashflow and get the benefits of the riskier and pricier long term capital gains in equity that property ownership provides.  Makes saving that 20% down payment happen real fast and when you've got it just rent out the room you were in for even more profit. 

Also with 5+ units the property becomes commercial, and opens you up to a whole host of financing options with a sound business plan. 

Or consider joining the Reserves or the Guard.  Veterans and Service-members pay 0 down without PMI.  Not technically without, but the full faith and Credit of the US Government subsidizes it heavily. 
« Last Edit: March 06, 2012, 03:29:58 PM by sirspiffy »

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Re: Advice on buying a home with no down payment
« Reply #25 on: May 03, 2012, 09:49:31 PM »
I bought a house with 0% down (VHDA in Virginia), with the intention of Renting my lower level. We can afford the house without a tenant, but now we have a tenant that pays about half of our mortgage and utilities. Paying the same now as when I was renting.

Praxis

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Re: Advice on buying a home with no down payment
« Reply #26 on: May 15, 2012, 09:45:48 AM »
There are many opinions on this and I have a pretty strong one, so don't take this the wrong way.

My advice is: don't even consider it.  If you _need_ a zero-down arrangement, then you cannot afford the house, full stop.  If you could buy the house and taking on more leveraged debt is an investment strategy, then I suppose that is different story.

I'd debate this.  I'm working on getting zero-down properties for investment purposes.

Bought my first investment home 20% down.  But after 20% down, then origination fees that totaled about 8% of the purchase price (house was cheap!), then another 10% of the house's purchase price in repairs, I was in close to 40% down.

I could buy maybe one more like that, or I can pick up several and build a huge cash flow.  As long as I don't outstrip my normal non-rental-derived income's ability to pay the monthly payments (so I'm not bankrupt if they're all vacant at once), and I keep an emergency fund for the case of loss of job, I don't see why this isn't the best way to leverage the cheap loan money of this market.

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Re: Advice on buying a home with no down payment
« Reply #27 on: May 15, 2012, 01:01:10 PM »
I should clarify that my post above is from the perspective of buying rental properties.

Since it sounds like you're looking for one for yourself...

A) Don't do it if you need it; you're over stretching yourself

B) Figure out how much money you are losing from PMI and the higher interest rates and how much money the 20% down would save you annually.  Figure out the annual cost difference from having higher interest on a larger sum, and add the annual PMI cost, then divide that by the down payment.  If your number is higher than .05 (5%), do 20% down.  If it is lower than .03 (3%), do 0% down and invest your money elsewhere.  Maybe go buy another home to landlord!

KittyWrestler

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Re: Advice on buying a home with no down payment
« Reply #28 on: May 22, 2012, 12:17:25 PM »
If you are buying your own primary house, don't even think about putting 0% down. You are fooling yourself. Save up 20% and then buy.

If you are buying a rental, that's different. You need to find a property that covers all of your expenses including mortgage, tax, PMI, insurance, maintenance cost and break even to be the least. If you have to put in cash each month on a rental, then walk away..