Ways to leap over the down-payment
hurdle -- page 2
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 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.
"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.
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
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.
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
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