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Five Best Low-Cash Ways to Finance a Home : Many properties can be bought with small down payments and an imaginative approach.

September 10, 1989|ROBERT J. BRUSS | Bruss is a San Francisco-area lawyer, author and real estate broker.

Many potential home buyers are so discouraged about ever owning a home that they have given up. Too many prospective homeowners think a down payment of at least 20% of the purchase price is required to buy a home. But that's not true. If you know the best sources of low-cash home financing you can buy with very little cash.

However, not all of these methods will apply to every home. But you may be able to combine several techniques to purchase a home. That's why it is important to know these best methods and then determine which will work for the home you want to buy.

To illustrate, if you want to buy a $200,000 home with zero cash, a new VA mortgage won't work because most lenders limit VA loans to only $144,000. However, several of the other low-cash techniques will work to finance a $200,000 home purchase. Or you may be able to combine a VA mortgage with a seller-financed mortgage. Here are today's five best low-cash home finance sources to consider:

Your best mortgage source. In these days of abundant but expensive home mortgage money, most home buyers and their realty agents have forgotten the home seller is, by far, the best home mortgage source.

Advantages for buyers include low interest rate, no application fees or forms and easy financing. Seller benefits include welcome interest income higher than is available at local banks and savings and loans, safety of a mortgage on your former residence and an easy quick sale for top dollar.

When buying any property, especially a home, always ask why the seller is selling. Often you will learn the seller is retiring and moving from the area. I find elderly home sellers are the best candidates for low-cash seller financing, especially if their home has been for sale several months and is vacant. You will be amazed how many elderly people own their homes free and clear with no mortgage and will gladly finance your purchase.

But first you must ask. Please don't be discouraged if the realty agent says with great authority: "I know the seller won't help finance this sale." Until the seller sees a written offer on the table, which provides for the seller to carry back a first or second mortgage, nobody knows for sure if the seller will become the buyer's lender.

FHA, VA and PMI mortgages. If you can't get the seller to finance your purchase, consider a new VA, FHA, or PMI (private mortgage insurance) home loan. The big advantage is low- or no-cash down payment.

However, these loans have drawbacks. The maximum FHA loan is only $101,250 (lower in some areas) and this is not enough in expensive areas such as most of California. But the FHA mortgage advantages are a down payment of less than 5% and a fixed-interest rate. Incidentally, the FHA maximum limit is expected to be raised later this year.

VA mortgages, available to qualified veterans, require no cash down payment except for a 1% loan origination fee. The maximum VA loan is $144,000 from most lenders but legally there is no limit set by the Veterans Administration. With both VA and FHA loans, be sure the lender has automatic approval authority, otherwise loan approval can take forever.

PMI home loans for 90% and 95% of the home purchase price are available from most banks and S&Ls. However, many PMI companies have had heavy losses recently, so PMI borrowers need good income and good credit to qualify. But there are big differences among PMI companies, which insure lenders against losses on the loan amount above 80% loan to value. If you get rejected by one PMI company, apply for a loan with another lender who uses a different PMI firm.

Lease with an option to buy. My favorite way to finance a home purchase is to lease with an option to buy. That is how I acquired my personal residence. If I can do it, you can, too. This method works in all price ranges. For example, last week I heard from a reader who is lease-optioning a $600,000-house.

Advantages for lease-option home buyers include locking in the option purchase price at today's market value, investing typically only $1,000 to $5,000 as non-refundable consideration for the option (this is much less than a customary down payment), negotiating a partial or full rent credit toward the down payment and keeping monthly costs below what it would cost to make monthly mortgage payments on the same property.

Advantages for lease-option home sellers include nontaxable receipt and use of the option consideration money (it becomes taxable when either the option is exercised or the option expires unexercised), higher-quality tenant than ordinary renters, little or no management work and continued income tax deductions for mortgage interest, property taxes and depreciation.

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