 A new survey reveals that 51% of renters consider coming up with enough money to make a downpayment the biggest hurdle to becoming a homeowner. But is it? Writing for Bankrate.com, Michael D. Larson says, “These days it’s downright easy to overcome what experts have long dubbed the ‘biggest obstacle’ to buying.”
So who’s right? Probably both. Just because it is easier to get the money for a downpayment does not mean that the people who need to know it, know it. What we have here is a failure to communicate.
The survey was sponsored by the Mortgage Insurance Companies of America (MICA). It also says that 84% of renters who plan to buy a home do not expect to make a 20% downpayment, the typical lender requirement.
Would-be homebuyers who do not make a 20% downpayment need to find a financing alternative to a traditional mortgage. That’s what Larson is talking about. “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,” he says.
I did an Internet search for “downpayment options” and came up with dozens of organizations offering all manner of no-down or low-downpayment options. One of the popular alternatives is cancelable private mortgage insurance (PMI), which enables families to buy a home years sooner with as little as 3% down, or less for qualified borrowers.
PMI isn’t just for first-time buyers. For homeowners looking to upgrade, PMI allows them to consider homes in a wider price range. PMI is insurance that protects the lender or investor against loss if the homeowner stops making mortgage payments. It does not protect the borrower. PMI costs vary but usually are 0.5% of the loan amount of the first year with lesser premiums in subsequent years.
Some loan originators have been promoting split loan structures such as 80-10-10 or “piggyback” loans. In an 80-10-10 loan, the homebuyer puts 10% down, borrows another 10% through a second mortgage (with a higher interest rate), and finances 80% through a conventional mortgage. This type mortgage, however, can prevent homeowners from accessing their equity for emergencies, home improvements, or educational expenses.
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The Nehemiah Corp. is a nonprofit group that runs a downpayment assistance program. It has provided millions in financial aid to borrowers. There are numerous other programs run by community organizations and state and federal housing agencies. (Editor’s note: Here in Texas, the Texas Association of Realtors Housing Opportunity Foundation and GiftFunder have created Texas Cares, a downpayment-assistance program that helps homebuyers with as much as 6 percent of the purchase price. (For more information, visit TexasCaresProgram.org.)
Nehemiah first convinces sellers to list properties with them. In exchange, sellers agree to pay 4% of whatever price they get to Nehemiah. Nehemiah finds buyers by offering to pay 3% of their purchase price. The result? Borrowers end up with a home for no money down. Of course, they may pay full market price, but at least they are homeowners.
Larson points out that lenders routinely loan money at 100% loan-to-value (LTV), 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.”
Minneapolis-based GMAC Residential Funding introduced a 107% LTV program in mid-2000. Loans cover the full value of the home plus closing costs. Freddie Mac will buy loans up to 100% LTV. Borrowers put a 3% downpayment into the purchase price. That means out-of-pocket costs on $100,000 are only $3,000.
Fannie Mae offers a variety of low and no downpayment mortgages. Flexible 100 is its no downpayment option for borrowers with good credit but minimal funds. Flexible 97 offers loans for a 3% downpayment.
Restrictions as to where downpayment money comes from have also been eased. Freddie Mac allows the borrower’s contribution to be a gift from a related person.
The bottom line is that today’s would-be homeowners have many options when it comes to handling a downpayment. Check with your banker or a local mortgage lender to see what they can do. Or, ask your REALTOR® about the Texas Association of REALTORS®’ new program with GiftFunder called Texas Cares. You may be surprised. You may be a homeowner sooner than you think.
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