How to save for that down payment
is a frustrating time for renters who want to buy homes but who haven't saved
much for down payments. Houses aren't getting cheaper and low mortgage rates
can't stay around forever. 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
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?
Dig 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 or 50 percent of your balance, whichever is
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.
"But," 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."
Borrowing 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
Some loan programs allow borrowers to use gift money to make down payments.
Generally, the gifts have to come from family members, spouses or domestic partners,
In 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
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.
"We said, '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 the townhouse.
Help for those who need it
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.
For 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 price.
The payments on the second mortgage roughly equal what would
have been the cost of mortgage insurance, but home buyers can deduct the interest
expense on their income taxes.
Piggyback loans have zoomed in popularity in the past few years
and are "kind of normal nowadays," says Bitton of Park Avenue Mortgage.
Can 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 Caribbean cultures.
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.
"In a way, it's forced savings," Bitton says, because
the susu system uses peer pressure to compel people to save.
-- Posted: July 1, 2003