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Debt-to-Equity Ratios Rising: Unless You Get FHA's $100 Down Payment Incentive, You'll Need a Bigger Down Payment

Written by Ilyce Glink on July 9, 2010 in Real Estate  |   5 comments

Sharon called my radio show a few weeks back. Her real estate broker had taken her to see a HUD home (which is nothing more than an FHA foreclosure). She could buy the house with only $100 down, but she’d have to pay $9,000 in…

Federal Housing Administration offers home buyers $100 down payment incentiveSharon called my radio show a few weeks back. Her real estate broker had taken her to see a HUD home (which is nothing more than an FHA foreclosure). She could buy the house with only $100 down, but she’d have to pay $9,000 in closing costs. The house was priced at just $102,000.

Something didn’t smell quite right. The Federal Housing Administration (FHA) does offer a program called the $100 Down Payment Incentive that’s designed to help the Department of Housing and Urban Development (HUD) get rid of unsold HUD homes.

In other words, no matter how much the house costs, you only have to put down $100, whether you’re a buyer or an investor.

Of course, that isn’t the sum total of the cash you’ll need. There are closing costs, although FHA will kick in as much as 3 percent of the sales price toward those closing costs. Plus, it will finance the transaction for those who plan to live in the house as a primary residence.

Real estate brokers will receive a $500 fee on top of their commission to help the deal close. And there are other incentives built in as well, such as an extra $1,000 for the buyer if you buy a HUD home within thirty days of its initial listing.

But when I checked with Shannon Judd, Georgia NSP coordinator for PEMCO, a company that sells HUD homes in twenty-six states, she agreed that $9,000 in closing costs on a property that costs $102,000 was suspect.

The FHA program and the USDA Rural Development zero-down loan program are anomalies. These days, lenders are typically asking borrowers to put more money down when buying property.

In fact, even the FHA has raised the minimum down payment it requires to 3.5 percent from 3 percent for a typical home buyer. For buyers with low credit scores, the down payment requirement rises to 10 percent.

Conventional lenders, who sell loans to Fannie Mae and Freddie Mac, now require a cash down payment of 5 percent. If you’re buying property as an investment, don’t be surprised if the lender asks you to put down 30 to 40 percent in cash.

Debt-to-equity ratios are rising because real estate lenders know that the more cash you put down on a property, the less likely you are to walk away from it. The problem is home prices in some areas have fallen 30, 40, or even 50 percent in value, wiping out all home equity for millions of homeowners.

When homes are that far underwater (meaning they’re worth less than the mortgage amount), homeowners are throwing up their hands and walking away from their properties.

Lenders believe that by requiring more cash for a down payment, not only will the mortgage payment be more affordable for the buyer, but there is also less chance that the buyer will walk away from the home.

Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.

READ MORE:
Will the Real Estate Summer Slowdown Mean Lower Prices?
No More Home Buyer Tax Credits: Is Now a Good Time to Buy a House?
How to Find a Great Real Estate Agent

5 comments

  1. Jamie Turner says:

    Thanks for providing some good tips on debt-to-equity ratios, Ilyse. My wife is in real estate, so this is helpful information.

    Keep up the great posts!

    Sincerely,
    Jamie Turner
    The 60 Second Marketer

  2. Ilyce says:

    Jamie:

    Thanks for your comment. It's interesting, but there's a story in today's Wall Street Journal about how banks and mortgage lenders are starting to do riskier loans. With banks and lenders continuing to tighten standards, it's interesting to see some reach out to what might have been considered "less than desirable" consumers.

    On the flip side, the government is trying to reach out to consumers who might ordinarily be shut out of a tight credit market by offering $100 down payment FHA specials.

    These are two distinct trends worth watching.

    Thanks for stopping by.

  3. Michal says:

    we are very thankful for this blog we got every thing which we needed to know. thanks again

  4. neestaples says:

    I have won 2 bids for 2 different houses in 2 different counties in Georgia. My problem is this–I end up losing the house because the property taxes have not been adjusted to the price paid for the house, and my lender will not finance the home because the taxes are too high. Pemco seems to do nothing to help, and my lender won't do anything but tell me to get another house. I am told I can go to the county tax assessor for a reassessment AFTER I buy a home–that's all well and good, but how do i get a home in the first place ?? This is a Georgia state wide problem, and not restricted to a few counties. What is a buyer to do ?? Many of the HUD forclosures come back up for auction several times, usually because the property taxes are too high and have not been adjusted to the selling price of the home.

  5. Jennifer A. Freeman says:

    Buying a HUD home can be a complicated process. Ilyce Glink is hosting a day-long seminar on Oct 2 on Buying foreclosed properties and real estate investing.

    The lunchtime keynote speaker is Shannon Judd, of PEMCO. She'll be talking about what's new in HUD homes and how to buy these properties.

    Please join us at the event and take advantage of this opportunity to ask the experts all of your HUD questions.

    http://realworldseminars.com/upcoming-events/schedule-for-how-to-profit-from-real-estate-investing/

    Jennifer
    Editor for the Equifax Personal Finance Blog


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