- - Friday, July 22, 2011

Most prospective homebuyers are aware of today’s stricter lending standards, but they also face another challenge when it comes to buying a home: the need for down-payment funds. At the height of the housing boom, a variety of no-down-payment loans were available, but those types of loans are rare in today’s tightened credit market.

Members of the military may qualify for a Veterans Affairs (VA) mortgage, which does not require a down payment, and zero-down-payment loans are available through the Department of Agriculture’s (USDA) Rural Development housing program, although those mortgages are restricted by the location of the property and the income of the borrowers.

Some banks and credit unions have loan programs that require little or no down payment, such as the Community Homeownership Incentive Program (CHIP) offered by BB&T bank, which, in the Washington area, is limited to those with a combined household income of up to $82,500 and to the maximum loan amount of $417,000. (Those with incomes up to $103,500 can borrow 97 percent of the home price).

Federal Housing Administration-insured loans are popular with first-time buyers, in part because of the limited down-payment requirement of 3.5 percent, but on a home that costs $300,000, the down payment needed still would be $10,500.

In addition, buyers need cash for closing costs and to keep cash reserves in the bank. Cobbling together the cash for a home purchase often requires both discipline and ingenuity.

According to the 2010 National Association of Realtors’ Profile of Home Buyers and Sellers, first-time buyers who made a down payment used a variety of sources: 74 percent used savings; 27 percent received a gift from a friend or relative, typically their parents; and 9 percent received a loan from a relative or friend. Eight percent tapped into a 401(k) fund, and 6 percent sold stocks or bonds.

One option available to many potential homebuyers is gift or grant money or a low-interest loan from a federal, state or local government program.

“I recommend that buyers take a homebuyer-education class, such as the one we offer at the National Community Reinvestment Coalition (NCRC), because not only is it important to be thoroughly prepared for such a big investment, but these classes provide a great way to find about all the resources and niche programs available to people for down-payment funds,” said Cheryl Cassell, director of the housing counseling network for NCRC in the District.

Buyers can take a free eight-hour homebuyer-education class, followed by one-on-one counseling from a HUD-approved organization, and receive a certificate of completion that can be used for down-payment or closing-cost assistance. Ms. Cassell said the Federal Home Loan Bank (FHLB) and Live Near Your Work programs offer down-payment help, along with state and local programs.

In Maryland, Tamika Johnson, a Realtor with Re/Max Specialists in Upper Marlboro, said down-payment assistance programs, which typically are income-qualified, offer up to 5 percent of the purchase price or a $5,000 grant that must be repaid only if the buyers stay in the home fewer than 10 years.

Michael Devlin, a loan officer with George Mason Mortgage in Fairfax, said, “Each county in D.C. and the Maryland and Virginia suburbs offers low-interest loans for down-payment funds or a grant for moderate-income households.

The Virginia Housing Development Authority (VHDA) “offers up to 101.5 percent financing to borrowers with up to $112,000 in income in Northern Virginia,” he said. “Consumers must take a homebuyer-education class to qualify for VHDA financing, but there are also smaller programs that offer loans of $3,000 to $12,000 for down-payment funds.”

Borrowers with incomes that are too high for government assistance programs often still struggle to save enough for a down payment, so experts have other suggestions for ways to find the cash to buy a home.

“Sometimes people can borrow money from their [Thrift Savings Plan] or 401(k) plan,” Mr. Devlin said. “First-time buyers are allowed to borrow up to $10,000 without paying a penalty for early withdrawal, although they will have to pay taxes on the money. Sometimes you are not required to repay the loan, but other firms require you to set up a monthly repayment plan. If that is required, that payment will be considered as part of the debt-to-income ratio.”

Ms. Johnson warns that you may be required to repay the loan more quickly if you leave the job, so she also suggests simply cutting back on 401(k) contributions for a little while and putting that money in the bank instead to be used toward a down payment.

Ms. Cassell said consumers should consult with an accountant before opting to borrow from their retirement funds because of the potential for tax implications. She suggested starting on a small scale to save for a down payment.

“We recommend keeping a daily diary of spending so that people can see more easily where they can spend less money on a day-to-day basis on things like carryout coffee,” Ms. Cassell said. “We also recommend the pay-yourself-first method of saving, setting up a savings account and transferring or depositing money automatically from each paycheck so you don’t even realize you ever had it to spend.”

Mr. Devlin said if buyers are heavily in debt, he suggests they pay off the largest debt as soon as possible and then save the extra money they were spending for a down payment.

“Another idea is to look at your current lifestyle versus your anticipated lifestyle and save the difference between your current rent and what you expect to spend on a mortgage payment every month,” Mr. Devlin said. “You can also put your utilities on an annual payment plan, which makes it easier to save.”

Mr. Devlin recommended establishing a savings account for an emergency fund, a long-term account for retirement savings and another account for a specific goal such as a down payment.

“Some people get a part-time job for 18 months or a year to build up their savings, but I think if overtime is available, that’s even better than a second job because usually you can earn more with overtime,” Mr. Devlin said.

Ms. Johnson said the tried-and-true method of borrowing from parents or getting a gift from them is an option for some buyers, but she also said some buyers sell items on eBay or Craigslist to build up funds.

“The main thing is just to commit to it, to sacrifice for a year if you need to, eating out less, going out less and having a savings goal to meet every month,” Ms. Johnson said.