Paying Nothing Out of Pocket for a SFH and Instant equity

[David Y M.]

Hi All, I had an idea recently to essentially pay 0 costs out of pocket for a home. Please tell me if I'm crazy for even thinking of using this method instead of just going with a 5% down 0 point 2.75% 30 year conventional loan. Maybe I just have too much time on my hands right now due to Coronavirus haha.

Assumptions that must remain constant for this to work: Interest rates remain similar in 6 months. Fannie May did a recent forecast that interest rates would remain low 3% even drop into the 2% range in the next 12 months. I know it's not really great to speculate but the money supply seems to be on a upside trend that's unlikely to stop. The obvious risk here is that I could have a lot of extra interest over the life of the loan, and higher monthly payments if rates increase.

Link: https://themortgagereports.com/65099/fannie-mae-predicts-2-9-percent-mortgage-rates-by-2021

I'm in Dallas, Texas right now, and our market is surprisingly getting pretty hot. Prices have seen a 6+% year over year increase in sales price, and days on market is also low. I was wondering if I should do this method to keep more reserves on hand and take advantage of the government program while I am still eligible.

Texas offers a Down Payment Assistance Program(DPA), and Mortgage Credit Certificate(MCC) for first time home buyers if you fall below a certain income (My first year working so still under that threshold). The DPA is a grant so free money. The catch is that there are extra third party fees in the underwriting process (roughly 1.5k) and the interest rates are set by TSAHC. 

Currently, a 4% FHA loan for DPA/MCC paired is at a 3.625% interest rate. The MCC essentially gives a 2k tax credit every year for interest paid. I know the exit for MCC isn't great but if house prices fall then it's a nonissue....

Link: https://www.tsahc.org/homebuyers-renters/calculator-results?credit=750&price=310000&loan_1=fha&assistance_1=4-grant&loan_2=fha&assistance_2=5-grant-gov

I was proposing to have seller pay closing costs, and raise offer price by an equal amount. For example, if list price is at 310k then I would increase offer by around 7-8k to 318k, and have seller pay closing costs.

AT CLOSE:  $0 costs out of pocket and instant 4% equity in the property. 

My next plan was to refinance the FHA loan to a regular conventional after 6 months of payments. Currently I have been quoted a 2.75% 0 point 30 year fixed rate conventional with a MCC paired (effectively like a sub 2.5% interest rate after tax return comes in).... It's kind of crazy. I've found that credit unions are able to offer some crazy low rates right now, but hopefully they didn't just bait me.

Another lender I talked to also has a program to cover most of the fees for a refinance including title and appraisal if I originate the first loan with them.

END RESULT AFTER REFINANCE COSTS: Net 4k-8k of free money, and pay $0 now, assuming I can lock a sub 3% rate in 6 months.

[Tom S.]

@David Y M.  I think the hardest part of your strategy "listed at $310k and raise the offer price by $8k".  The lender will still probably only appraise it at $310k, the original listing price, and lend based off that amount. It's possible it may appraise over asking, but I wouldn't necessarily count on that.