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Programs that cure the down-payment blues

Cure the down-payment blues Coming up with a down payment has traditionally been one of the biggest obstacles to buying a house. But savvy buyers can take advantage of programs designed to cure the down-payment blues without charging high interest rates.

Programs are available for borrowers from a wide range of incomes and places. What these borrowers have in common, whether they are teachers in California or cashiers in Memphis, is trouble saving enough money to make a down payment on a house.

The programs "make it easier for people with less money to put down -- and who may have had a minor credit issue in the past -- to qualify for a conventional mortgage," says Ralph Perrey, director of Fannie Mae's Tennessee Partnership office.

The key is that these are conventional mortgages, without the high rates of subprime mortgages.

Fannie and Freddie
Until the 1990s, conventional mortgage lenders usually required borrowers to come up with a down payment of at least 20 percent. It was hard to save that much money while paying rent.

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Now, after years of steadily relaxing lending standards, marginal borrowers routinely get loans for 97 percent or 100 percent of a house's value, allowing them to buy houses without having to save money for a long time.

The downside of such loans is that they tend to carry higher interest rates. Someone with good credit and the ability to make a 20-percent down payment might get a 30-year loan at the best available rate, while someone with the same credit, but who can't make a down payment, might pay up to 1 percentage point more.

That's where Fannie Mae and Freddie Mac enter the picture. These government-sponsored enterprises buy mortgages and package them as investments. They want to encourage homeownership, so they frequently team with lenders, nonprofits and state and local governments to help people who have trouble getting affordable mortgages. In Perrey's words, they try "to help more lenders say yes to people."

Among the many programs:

  • School employees in California, who face some of the nation's highest housing costs while earning teachers' salaries, can take advantage of a zero-down program courtesy of their pension fund, CalSTRS.
  • Teachers and other school employees can borrow 95 percent of a house's value from a CalSTRS-affiliated credit union or lender, which sells the loan to Freddie Mac. They borrow the other 5 percent through CalSTRS affiliates, too -- but payments on that portion of the loan are deferred until the house is sold or 30 years pass.

    Freddie Mac expected $100 million in loan volume in the first year; loan volume hit $140 million. "Clearly, there's huge pent-up demand for affordable housing in California," Freddie Mac spokesman Brad German says.

    Freddie Mac is looking for partnerships with other public pension funds to, as German puts it, "come up with the down-payment wedge that allows public employees to become homeowners." So far, the partnership with CalSTRS is the only one.

  • In Memphis, Fannie Mae and Union Planters Bank are targeting minorities and low- and moderate-income residents with a program that requires buyers to come up with as little as $250 of their own money to cover the down payment and closing costs.
  • Union Planters' Custom CRA mortgage requires borrowers to scrape together at least 3 percent of the house's cost to pay the down payment, fees and closing costs. Depending on the price paid for the house, buyers have to contribute $250, $500 or $1,000 from their own savings. The rest of the money for down payment and closing costs can come from their own savings, gifts from family members, or grants from employers, nonprofits or government agencies.

  • In Rock Island, Ill., renters who collect Section 8 rental-assistance vouchers can take advantage of a complex mortgage program involving the local housing authority, community development corporation, Consumer Credit Counseling Services, American Bank and Trust of Rock Island, and Freddie Mac.
  • Section 8 renters who save enough for a 2 percent down payment on a house can get a grant from the Rock Island Economic Growth Corp. for the rest of their down payment and the closing costs. For a few years, they can use their Section 8 vouchers to supplement their mortgage payments.

Finding out
Finding out about these programs can be tricky. If you're a teacher in California, you probably have received word about mortgages through CalSTRS partners. But what if you're a cop in Massachusetts or a mechanic in Arkansas? There might or might not be a program available for you -- you have to ask around.

You can start by asking lenders if they offer conventional mortgages with low down payments in conjunction with Fannie Mae, Freddie Mac or nonprofit or government agencies.

Fannie Mae allows you to search for its affiliated lenders through its Homepath Web site. Or you can call 800-732-6643.

Freddie Mac doesn't have a Web site for consumers or a number to call to find a lender. "The best way is to simply call your lender," German says. "Lenders are always eager to make everybody aware of these programs."

-- Updated: March 25, 2003
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Should you buy a house even if you can't put 20 percent down?
How large a down payment should you make?
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