A dozen ways to get a down payment |
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Down-payment programs run by state and local housing
authorities offer grants and low-interest deferred-payment loans
to homebuyers, though the restrictions can be "pretty severe,"
says Ed Craine, CEO of Smith-Craine Finance, a mortgage company
in San Francisco. Some programs require borrowers to live in a disadvantaged
neighborhood. Others have income limitations, for example.
"The biggest problem tends to be that if you make
enough money to qualify for a loan, you probably make too much money
to get the down-payment assistance," Craine says.
Down-payment assistance programs offered by private
organizations -- Nehemiah Corp. and AmeriDream are two of the largest
-- convert money contributed by the seller into the buyer's down
payment.
"They are using the seller's equity to fund a grant
which allows the buyer to buy with no money down," says Peter Thompson,
a senior loan officer with Professional Mortgage Partners in Downers
Grove, Ill.
These programs "serve a need for people who struggle to save a down payment, if the seller is motivated to
contribute," Gwizdz says. But these programs are not without controversy. The down payment is of value only if the homebuyer
can afford the monthly payments, he says, and whether someone who didn't have the discipline to save a down payment would have
that discipline to make the payments may be questionable.
The FHA has tried, so far unsuccessfully, to ban the
use of private down-payment programs in conjunction with FHA loans
because FHA-insured loans that used these programs had a significantly
higher incidence of default and foreclosure than loans that didn't
use such assistance, according to an FHA study.
"FHA loans made to borrowers relying on 'seller-funded
down payment assistance' go to foreclosure at three times the rate
of loans made to borrowers who make their own down payments," FHA
Commissioner Brian Montgomery said in a May 2008 speech.
Nehemiah Corp. CEO Scott Syphax, in a June 9 statement,
said the government shouldn't restrict access to homeownership.
Down payment or closing costs?
Should homebuyers who have limited funds allocate more money toward their down payment or set aside some share of the total
for closing costs? The simple answer is that the down payment should be the first priority, up to at least 5 percent (or 3
percent for an FHA-insured loan) of the purchase price. Thompson explains why: "It doesn't matter if they have the money for
closing costs if we can't show (the lender) that they have the money for the down payment."
If you've saved enough for a down payment, but not closing costs, here are some options.
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| How to get closing costs: |
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Ask the seller to pick up the tab. |
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Pay a higher interest rate in exchange for lender-paid closing costs. |
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Wait to buy a home until you've saved more money. |
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If you want the seller to pay the costs, you should discuss that concession upfront before you sign a purchase
contract because payment of costs is a negotiable term that affects the seller's net proceeds from the transaction, Thompson explains.
Borrowers can reduce or even eliminate their closing costs by paying a higher interest rate on their mortgage,
Craine adds. This sophisticated strategy should be discussed with your loan officer, but the basic rule of thumb is that an
additional 1/8-percent higher interest rate will net a credit against closing costs equal to 1/2 percent of the loan amount. For
example, an additional 3/4-percent in interest might eliminate closing costs of 3 percent. The catch is that as your credit gets
larger, it takes a bigger interest rate jump to achieve the same amount of savings.
"Instead of your total costs being 3 percent at one end of the spectrum and zero at the other end with a 3/4-percent
higher interest rate, you could compromise on whatever combination of closing costs and interest rate you want," Craine says.
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