REALTOR Magazine is reporting that as many as 30% of home buyers nationally don't put any money down when buying a home. As an experienced Utah REALTOR, I actually found that number to be shockingly low. I don't have the official Utah numbers, but I can relate that most (maybe 90%) of my buyers do not put any money down on their new home. Further, nearly 100% of these buyers ALSO finance in their closing costs. In Utah we call that concept "Seller's Concessions."Say for example a purchaser makes an offer on a $100,000 home. In the old days, the buyer would be expected to bring 20% of that, or $20,000 to the table, and finance the other $80,000. But over time, home ownership was declining because it was more and more difficult for families to scrape together this kind of money. "No Down Payment" programs sprung out of the country's need for more Amercans to own homes. My buyers who do have cash, and could potentially put the cash into the purchase, are opting instead to keep the cash for things like window treatments and other move-in expenses. Of course, this raises the payment significantly, but current generations are not worried about being in debt like their grandparents were. So, as long as the payment works correctly into the proper debt-to-income ratio, the buyer is good to go with no significant raise in their loan's interest rate. Many more people who otherwise couldn't, now own homes because of these programs.
Something else that is very common in Utah is to finance in the closing costs as well. Typically we verbalize this concept in the contract with a phrase such as: "Seller to pay for buyer's closing costs and fees, not to exceed 3% of the purchase price." It's likely sellers will get themselves in a wad over this, but this verbiage is actually misleading.
Let's take our example, the $100,000 home. The buyer wants to finance the full amount (no down payment). Further, this buyer does not have the cash to pay the lender's closing costs (around 3% of the loan amount) so they are asking for the sellers to pay them. When we write the contract, however, we would write it for a purchase price of $103,000 to compensate for the full amount the buyer wants to finance.
At funding, distribution looks like this: $100,000 goes to the seller, $3,000 goes to the lender making the loan, and the buyer finances $103,000. The seller still gets the same amount of money in the sale, but the buyer is financing more. Surprisingly, there is still no appreciable increase in interest rate, even though the lender is now assuming ALL the risk.
The problem with this scenario is now the buyer has paid 103% of the value of the home. They are immediately upside down. Discouraging, but the truth of the matter is that there are many more homeowners in our country now because of these kinds of loans. So many people in Utah choose this option that unless they have held their home long enough to pay down the balance, or enjoy substantial increased appreciation, they can't sell the house for what they owe. Ouch.
This is so common in Utah that we now sport the number 1 spot in foreclosures in the country. People can't sell the house for more than it is worth, and they don't have the money to make up the difference. So, they walk away from the house and either short-sale it or allow a foreclosure.
When buying a home under these conditions, be careful and ask questions. Make sure you understand your loan product and that your REALTOR asks a lot of questions of your behalf.
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