The fact is that you’re able to purchase a house with little money down is not a problem, its leveraging debt to income and the Lending environments rule. Leverage is a wonderful thing as long as there is a plan in the background! I would recommend that the person comfortable leveraging the numbers would have a successful financing planner working for their money that is not tied up on the house purchase. Also, I would recommend that the person’s accountant would help advise someone with a low down payment in vetting the plan of execution so that your aware of your path towards financial success.

My issue with clients with 3.5% down on a house is that when you sell a house, you pay 6% or higher. The broken piece is that your transaction costs and your equity in the property could be imbalanced. In this scenario, when you Sell a house you are gambling on the market appreciation or are you only going to take a clients built equity to pay your agent for that professional service? That doesn’t sound like good business!

If you have read my story titled “Is the American Dream, just a dream?” you will have more understanding of the ‘equitable position’ of owning Real Estate. I just had a client in the booming market of Madeira, a suburb of Cincinnati- loose money on a house that they bought in 2010; arguably pre-recovery. On a phone call with the client 2 days before Closing, he said “You know a house is more of an asset if you only do the maintenance, it can be an investment but you need to constantly work to improve it!” That was the best explanation that I have heard to date and I needed to write that down!

In summary, I would recommend that if someone is only putting down a minimal amount of down payment, that they have liquidity elsewhere in their life so that the “big gamble” isn’t on the house. Also, this concept of reinvesting constantly makes you wonder if your debt service to income ratio is low enough that you have monthly cash flow for those stabilization projects. As a rule of thumb, you are supposed to have 6 months of ‘Living’ within an investment vehicle that can be liquidated without major penalty in less than 3 days.

If you read this and want more information or coaching on the correct next steps for you, I would love to have that conversation and refer you to a professional financial planner so that you can make educated buying and selling decisions. No reason not to Win!

Stories like this make people who don’t own property happy. It should make people who own property nervous. Why?

The economic tool used to allow people with less than 20% down payment to buy a house is called PMI, private mortgage insurance. The insurance policy is property specific and it is in place until the borrower has paid enough principle into the loan- totaling 20%. The goal of this PMI is to fund the premium on an insurance policy that becomes paid to the bank/ note holder if the borrower defaults on a loan that was underwritten within the legal parameters. I make this last comment because during the days of predatory loan companies, PMI was not paid to those companies, instead they got the property back with the ‘note’. The common business practice is to package and sell loan ‘Note’ to a large corporation- ie Fannie Mae or HUD.

While the foreclosures have slowed to a creep, the reduction in the overall cost of this PMI insurance is concerning because it allows people to be highly leveraged once again- putting our housing economy at risk. Owners need equity or ‘skin in the game’!

If you read other articles on the site, you will see that I am a self proclaimed realist and my reality is that my house is currently a tax deduction tool, but otherwise, it looses me money on paper every month because of continued capital improvement projects, time invested maintaining a clean and healthy home.

Making homes more affordable is accomplished by building homes with a longer life cycle cost. If water heaters, furnaces, roofs, garage doors, windows, etc all lasted 40 years, you would have an affordable house. Although the reality is water heaters are listed as 8-12 year life cycles, furnaces 15-20 years, roofs upto 40 on a new well vented dimensional shingle, etc! Even in a new house, you have replacement costs within the first decade of ownership!

I would recommend to Buyers in this buying environment to circumvent the 20% down payment by looking at grant dollars- local, state and national OR waiting until the bank account reflects 20% and the loan payment will allow you to attain your personal financial goals.

I give this reduction in PMI a thumbs down!

Call to Action- if you need help with personal financial goals or want more information on local, state and national grant programs- contact me! John Payne 513-500-7474