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VA still has zero-down home loans

The Baltimore Sun

Nothing down. To a first-time buyer who doesn't have a lot (or any) cash for a down payment, mortgage loans that allowed you to skate by without having any skin in the game were a fast ticket to homeownership over the past decade.

Thousands of home buyers chose a 100 percent mortgage to grab their piece of the American dream, neatly side-stepping the single biggest obstacle to homeowners: cash for a down payment.

Too bad the credit crunch has almost completely wiped zero-down mortgage loans off the table.

Several mortgage brokers and bankers say there is only one 100 percent loan that is generally available: a VA loan, backed by the full faith and credit of the federal government through the Department of Veterans Affairs.

But VA loans are only available to those who have served at least 90 days on active duty during wartime service and have been discharged with something other than dishonorable conditions. Alternatively, you must have served at least 181 days of continuous service during peacetime, with the same discharge requirements.

Selected Reserve and National Guard members would qualify for a VA loan with long enough service histories, as would an "unremarried spouse of a veteran who died while in service or from a service disability," or the spouse of a service person missing in action or who is a prisoner of war, according to the VA Web site (

Even if you are eligible, VA loans are expensive, especially if you don't have any cash for a down payment. The VA requires borrowers to pay a funding fee of 2.15 percent for regular military veterans who are using their entitlement for the first time. If you put down 5 percent to 10 percent, the funding fee drops to 1.5 percent. If you put down 10 percent in cash or more on your purchase, the funding fee drops again, to 1.25 percent.

For a subsequent purchase, the funding fee rises to 3.3 percent, if you don't have any cash to put down on the property. Similar funding fees are charged for cash-out refinances. Of course, if you had 3.3 percent to pay as a funding fee, you'd probably look for a different sort of loan.

At the Federal Housing Administration, you can't get true 100 percent financing, but you can get pretty close.

The FHA allows borrowers to get a loan for 97 percent of the purchase price. You are allowed to receive the 3 percent cash as a gift from either a family member or relative, or a nonprofit organization.

While HUD recently tried to outlaw third-party nonprofit organizations from providing down payment cash if the organizations receive funds that are generated from the transaction (such as funds paid by the sellers), the ruling was set aside this year by U.S. District Judge Lawrence K. Karlton of California.

In the case of Nehemiah, the nonprofit organization that fought the ruling, the nonprofit would put up the 3 percent down payment required by FHA loans, and after the transaction closed, the seller would give somewhat more than 3 percent of the sales price back to Nehemiah to replenish its funds.

The bottom line for borrowers in this arrangement was a mortgage loan that required no down payment.

Who would benefit from an FHA loan? One lender described the profile as a dual-income married couple with marginal credit (credit scores of 580 to 600) and no savings, living paycheck to paycheck.

Other zero down payment mortgages have mostly disappeared from the marketplace. Investors seem unwilling to buy these loans, so the secondary mortgage market for them has dried up.

Contact Ilyce Glink at www.thinkglink.

com, or by mail at Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022 or by calling her radio show at 800-972-8255 from 11 a.m. to noon Sundays.

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