Ways to leap over the down-payment hurdle
Today is a frustrating time for renters who want
to buy homes but who haven't saved much for down payments. Mortgage
rates are on the rise, houses aren't getting cheaper and it seems
like time is running out.
"It would take me at least another year
or two to save another $10,000 to $15,000, and, frankly, I want
to purchase a house before the costs are out of reach," e-mails
a reader from Long Island, where the median house price rose more
than 20 percent last year.
He has more options than he realizes. There are myriad
ways to leap the down-payment hurdle. Some strategies are for people
who have some money saved up somewhere, and other strategies are
for people who are practically broke.
It has been a long time since home buyers were required
to come up with 20 percent down. Some lenders will lend 100 percent
of the purchase price or even 103 percent. More commonly, lenders
underwrite mortgages with 3 percent or 5 percent down. The question
becomes: How do you come up with that 3 to 5 percent?
into the nest egg?
You could tap your retirement savings, either
borrowing from a 401(k) account or withdrawing money early from an
Individual Retirement Account.
When you borrow from your 401(k),
you repay the loan over five or more years, with interest. Most 401(k)
plans will let you borrow up to $50,000 of your balance or 50 percent, whichever
One problem with borrowing against your 401(k)
is that you will have to repay the loan within 90 days of losing your job or quitting.
That can make a layoff even more stressful, and can serve as a pair of golden
handcuffs that chain you to your job, even if a better one comes along. If you
can't repay the loan in time, you have to pay penalties and taxes on an early
An advantage of borrowing against a 401(k)
is that it doesn't count as debt when lenders assess your qualifications for a
loan, says Ellen Bitton, president of Park Avenue Mortgage in New York City.
Withdrawing money from an IRA can be a good strategy for first-time home buyers
You pay taxes on the disbursement, but a 10-percent early-withdrawal penalty is
waived if you use the money to buy your first home. Some advisers warn against
removing money from a retirement nest egg.
says Bitton, "in the long run, you'll probably have more appreciation on
the money invested in real estate." She pauses, then adds with a laugh, "And
maybe not. There are no hard-and-fast rules."
against retirement savings is fine for people who have money set aside for their
golden years. But what about people who have virtually no money in the bank?
Gifts from family and friends
programs allow borrowers to use gift money to make down payments. Generally, the
gifts have to come from family members, spouses or domestic partners, or nonprofits.
fact, an entire industry of nonprofit organizations has sprung up to fill this
need. Most of the time, the home's seller "donates" 3 percent of the
home's sale price to the nonprofit, plus a fee. The nonprofit then gives the buyer
that 3 percent at closing, with the money serving as the down payment. Almost
all loans using this approach are insured by the Federal Housing Administration.
Jason and Rebecca Postlethwait are using such a program to buy a house in Baltimore.
When their landlord notified them that the monthly rent on their townhouse was
going from $900 a month to $1,100, they decided to go house-hunting, even though
they had some past credit problems as a result of lost jobs, and even though they
had little saved for a down payment.
'There's got to be a program for us,'" Jason Postlethwait says.
Their real estate agent told them about the Home Solution program, in which the
seller ultimately contributes 3 percent for the down payment. Their monthly house
payment will be less than the $1,100 they would have spent to continue renting
Help for those who need
Another down-payment option is to take advantage of programs
run by nonprofits to help low- to moderate-income people buy their own homes.
These programs are of all sizes and kinds. Some are run by community development
corporations that fix up abandoned houses in blighted neighborhoods, then team
up with lenders that offer low- or no-money-down loans to qualified buyers. Habitat
for Humanity requires buyers to contribute "sweat equity" by working
on their and other people's homes.
Most states have housing
finance agencies that offer special loan programs for low- to moderate-income
buyers. Fannie Mae, the biggest buyer of mortgages, offers loans through housing
finance agencies that require down payments of as little as 1 percent or $500,
whichever is less.
No-down and low-down
No- and low-down payment loans have the disadvantage of requiring costly mortgage
insurance. You can avoid mortgage insurance by getting a "piggyback loan":
a home equity loan that piggybacks on top of a primary mortgage.
example, you could put 5 percent down, get a primary mortgage for 80 percent of
the home's price, and a higher-interest home equity loan for 15 percent of the
This is what Joel and Kathleen Eden plan to do. They
are buying a house in Cherry Hill, N.J., with a 5 percent down payment from the
proceeds of the sale of a condominium they own. They are getting a 20-year home
equity loan for 15 percent of the purchase price, and a 30-year mortgage for 80
percent of the price. They won't have to buy mortgage insurance. That suits Joel
Eden fine. They are paying $40 a month in mortgage insurance on their condo, and
it feels like wasted money.
Mortgage insurance "seemed
like a painful thing to pay," Joel Eden says, because it protected the lender
and not him.
The payments on the second mortgage roughly equal
what would have been the cost of mortgage insurance, but the Edens can deduct
the interest expense on their income taxes.
have zoomed in popularity in the past few years and are "kind of normal nowadays,"
says Bitton of Park Avenue Mortgage.
you say 'susu'?
For something exotic, she throws out another
option -- susu, a method of saving money that can be found in some African and
A susu savings plan consists of a group
of people who pool their money and distribute it among themselves periodically,
one by one. For example, a dozen people might contribute $1,000 each into the
pool every month for a year. In the first month, one person gets $12,000. The
next month, the next person gets $12,000, and so on. At the end of the year, each
person has contributed $12,000 and received $12,000.
a way, it's forced savings," Bitton says, because the susu system uses peer
pressure to compel people to save.