How does Zero-Out-Of-Pocket financing work?

To accomplish financing 100% of the purchase price, closing costs and other items, you and the home you plan to purchase must satisfy some “make sense” criteria. 

Foremost of these is the property must be able to appraise at a high enough value to cover all these costs.  This means that the comparable sales in the surrounding neighborhoods must support that higher value in order for the appraiser to be able to substantiate it when the value comparisons are made.  This is not uncommon in today’s market where individuals and banks are accepting offers below market to liquidate properties that are stressing them financially.

Another criteria that needs to “make sense” is your income.  Loan programs such as the USDA’s Guaranteed Rural Housing are targeting financially stable buyers.  Credit scores must meet minimum standards and debt ratios are limited to modest maximums.  Wall Street investors continue to buy loan portfolios with these programs because they have a history of being a safe investment. 

Finally, the offer is structured such that everyone is fully aware of the transaction’s end goal of zero out of pocket for the borrower.  The seller will need to agree to an offer price that allows them to contribute the closing costs and pre-paid items at closing.  This practice is now in common use and as long as every aspect of it is disclosed, it works for everyone.

To make this work with an FHA loan requires a generous close relative of the buyer to contribute the 3.5% down payment.  This is in the form of a gift with a gift letter to document everything.