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The Purchase and Cashout Question

I need to get a loan large enough to purchase a house and consolidate credit card debt at the same time and with little down pa

I need to get a loan large enough to purchase a house and consolidate credit card debt at the same time and with little down payment. Friends have told me they have purchased homes in this same manner...sometimes with no down payment... I've never purchased a home before and therefore am clueless ...how does this work?? I know there must be "penalty fees" involved for not having a sufficient amount of down payment.

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Bill's Answer
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Unfortunately, I think it highly unlikely that you will be able to find a loan that will fit the parameters outlined in your question. You very well may be able to find a home loan with little or no down payment, but you probably will not find a loan that will offer you the cash you need to consolidate credit card debts at the time of closing. "Cash out at closing" loans were available to borrowers before the sub-prime home loan crisis hit a few years ago.

There were two basic methods designed to provide buyers with cash at closing on new home loans. The first involved a seller who was desperate to sell his home, such as a person in the beginning stages of the foreclosure process. In this scenario, the seller would offer the buyer a portion of his equity in order to encourage the quick sale of the home. For example, if a seller has $50,000 in equity in a home (the difference between the sale price and what they owed on the home), your purchase loan would be for the full asking price of the home, then the buyer would turn around and give you a portion of their equity. The problem with this option is finding a seller willing to sacrifice a portion of his hard-earned equity; most sellers will scoff at the suggestion that they pay over part of their equity to the person buying their home.

The second method is considered somewhat dishonest by the mortgage industry, but it was used by some brokers to entice buyers into home loans. Basically, a broker and an appraiser colluded to over-appraise the value of the home. For example, if the seller is offering the home for $450,000, the appraiser could appraise the home for $500,000, increasing the amount of the loan. At closing, the broker will pay the seller the $450,000 asking price, and give you the $50,000 difference as "cash out at closing." The problem with this method is that it is fraudulent; you, the broker, and the appraiser are colluding to defraud the lender, which could be illegal, and many people would say is unethical. I encourage you to steer clear of any broker offering this type of financing. Another potential problem is that you will owe more on the home than the home is worth, which could be a serious problem if you run into trouble with the loan, as you will likely not be able to sell the home for what you owe on it.

Even if you are interested in this type of loan, you will probably have a much harder time finding a broker who will assist you than you would have last year. This particular type of loan was a common scheme used by less-than-scrupulous sub-prime lenders, but with the tightening up of the sub-prime market, lenders are much less likely to fund this type of loan.

To look into low or no down payment home loans, I encourage you to visit the Bills.com Home Purchase page.

You can submit your contact information to the Bills.com Savings Center at the top of the page, and we will have several pre-screened mortgage brokers contact you to discuss the options available to you. I wish you the best of luck with you home search.

I hope the information I have provided helps you Find. Learn. Save.

Best,

Bill

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2 Comments

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  • BA
    Dec, 2009
    Bill
    I believe many banks are giving buyers more than $8,000 in discounts on properties the banks are selling in short sales, deeds in lieu of foreclosure, and REO sales. I doubt any banks are giving buyers rebates in the manner you described, but I suppose anything is possible. I would not cite as my source "a person who says his brother," however.
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  • JO
    Dec, 2009
    John
    Recently talked to a person who says his brother is doing well in the first time 8,000 tax credit home purchase program. The money is being given to the first time buyers at the time of purchase. Thats as we know is not the 8,ooo tax credit money. So are the banks with appraisers doing just a little illegal service to move the real estate? Maybe their are that many home owners willing to give 5,000 to 8'000 to the purchaser. Is their a required form to be submitted by our real estate companies or agents? Allentown PA. and Leheigh Valley is where I'm been informed this is happening.
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