Coming up with down payments getting easier
By Michael D. Larson • Bankrate.com
Down payments a major hurdle to homeownership?
Not any more.
These days, it's downright easy to overcome what experts have long dubbed the "biggest obstacle" to buying. Lenders have dramatically eased their down payment requirements while allowing more types of government assistance, grants and gifts to be used in place of a borrower's own money. As a result, even customers with little or no spare change shouldn't be afraid to talk to a lender and see if they can take advantage of today's low rates to buy.
"A lot of people, when they go to purchase a home have the money for the mortgage and they have good credit, but they don't have the opportunity to save for a down payment," says Lori Reed, a spokeswoman for the Nehemiah Corp. of California in Sacramento. The nonprofit group runs a down payment assistance program that has provided more than $421 million in aid to some 120,000 borrowers in the past five years.
"The industry has seen that people need help to get into homes, that there's obviously a need there."
Time for change
Borrowers and lenders alike used to lament the difficulty of coming up with a down payment and its impact on homeownership. For many years companies wouldn't even give mortgages to people who couldn't pay at least 20 percent of the purchase price of their homes. But since the mid-1990s, the down payment barrier has all but crumbled.
Lenders routinely loan money out at 100 percent loan-to-value, meaning borrowers can obtain mortgages for the full price of their homes. Some go even further, offering loans at an even-higher LTV so consumers can finance their closing costs too. They've eased their restrictions on where the down payment money comes from too. Throw in assistance programs run by nonprofit groups, such as churches or community organizations, and state and federal housing agencies and it becomes even easier to solve the down payment dilemma.
Savvy consumers seem to be taking notice. Of borrowers polled for the 2001 Fannie Mae National Housing Survey 53 percent said coming up with enough money for a down payment and closing costs was a "not an obstacle." That's up from 48 percent in 1999.
"You're not going to have to wait while you're trying to save $150 a month to get that down payment" anymore, says Matt Miller, director of affordable lending at McLean, Va.-based Freddie Mac. "There are ways to get into a home earlier."
Consider that Minneapolis-based GMAC Residential Funding rolled out a 107 percent LTV program in mid-2000. It allows borrowers who visit one of the wholesale lender's mortgage bank or broker clients to get first mortgage loans that cover the full value of their homes, plus closing costs. That's even more generous than the 100-percent and 103-percent financing offers available for a couple of years.
It "benefits both qualifying first-time home buyers with limited funds and borrowers who have sufficient funds for down payment but prefer to leave those funds in other, more flexible investment vehicles," Eric Scholtz, the company's managing director of capital markets, said in a recent release discussing the product. "We are offering borrowers more options."
New ways to borrow and pay down
Borrowers can use money from third parties in ways that weren't allowed before too. Investor Freddie Mac buys loans from lenders and sets standards that the mortgages it purchases have to meet. In the past, the agency wouldn't buy loans from lenders unless their borrowers put at least 3 percent down, using their own money. Since consumers generally have to pay another 3 percent or so of a home's purchase price in closing costs, the out-of-pocket tab for a $100,000 property was something like $6,000.
Now, Freddie Mac will buy loans up to 100 percent LTV. Borrowers still have to put at least 3 percent of the purchase price "into the transaction." That 3 percent can be used to cover the closing costs. If the closing costs are less than 3 percent, the difference is put toward the down payment. But because the customer no longer has to come up with a down payment too, the out-of-pocket cost on a $100,000 home falls to $3,000. As a further concession, Freddie Mac allows the borrower's contribution to be a gift from a related person, rather than the person's own money.
"If you take the relatively short past, the 90 percent loan, the 95 percent loan was sort of the norm, the highest level people were going to," Miller says. "But we've been moving into higher loan to values now.
"And probably one of the biggest changes we have seen over the past couple years," he adds, is "the ability to use flexible sources for that down payment."
There are other innovative ways to avoid down payments, too.
Nehemiah works by first convincing sellers to list their properties with the nonprofit company, offering greater visibility and more buyer traffic. In exchange, sellers agree to pay 4 percent of whatever price they get to Nehemiah. Nehemiah then recruits buyers, offering to pay 3 percent of their purchase prices out of the pool of money it generates from those sellers.
Borrowers end up getting into homes for no money down as a result, though they usually pay full market price for their properties since sellers typically aren't willing to accept reduced offers on top of the 4 percent fee. The Department of Housing and Urban Development has expressed some reservations about the way Nehemiah operates. It fears that Nehemiah buyers -- who often use Federal Housing Administration loans when purchasing -- will default more frequently since they don't have to put any of their own money into their transactions. But for now, it's business as usual.
"This is not a loan. This is a gift," says Nehemiah's Reed. "It allows them the opportunity to pursue the American dream of becoming a homeowner."
Miller says that's exactly what people should do too -- even if they don't think they have enough down payment money squirreled away.
Today's programs "keep people from being shut out of the market."
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