- The Washington Times - Friday, June 21, 2002

You have a good job, interest rates are down, and you have found just the right house to raise your growing family. There's only one problem. Even though you qualify for a mortgage, you don't seem to have the funds available to make the down payment. Worse, you don't have a rich uncle.

Don't despair, says Pat Jablonski, chairman of the board of the Northern Virginia Association of Realtors and senior vice president at Better Homes Realty in McLean. You might not have a rich uncle, but there are plenty of ways to come up with the money. You just have to think outside the box.

"There are a variety of ways to come up with the money for a down payment," he says. "You just have to be creative."

No longer is the 20 percent down payment de rigueur. Down payments can be 3 percent, 5 percent, 10 percent or 20 percent of the sale price for conventional loans and zero to 5 percent on Federal Housing Administration (FHA) or Veterans Administration (VA) loans. There also are any number of state and federal first-time-buyer programs.

So it is easier to be creative. The Federal Home Mortgage Corp. (Freddie Mac) offers a conventional loan with zero money down.

The Freddie Mac Building Down Payment program for new home buyers allows home builders to contribute to the down payment on behalf of the buyer up to 3 percent of the home price.

Meanwhile, Freddie Mac's 21st Century Lease-Purchase plan makes it possible to purchase a home with no down payment. Under this program, designed for no-credit or bad-credit borrowers, a three-year lease period is used to give the prospective purchaser time to demonstrate financial responsibility. Afterward, the family can assume a mortgage from a nonprofit authority.

Other companies also offer options for low- to moderate-income home buyers who don't have the cash on hand for a large down payment.

Wachovia, for example, offers a Partnership Mortgage program that requires qualified borrowers to put just $500 down. Its Affordable Mortgage Program allows for 97 percent financing of a home on a fixed-rate mortgage. Both programs are for people who do not own a home and intend to use the funds for a primary residence.

For a conventional loan, a lower down payment likely means a larger mortgage payment. Generally, the larger the down payment, the better your access to the best rates for mortgages. If you can put down 25 percent or more, a number of easy qualifier loan programs are available that will work for you even if your credit is less than stellar.

Usually, if you are banking on no down payment, it is imperative that your credit record be impeccable. Lenders like it when a purchaser can prove a commitment to the home. A down payment is a foolproof way for homeowners to demonstrate what they are willing to invest in their house. Without that positive proof, a spotless credit rating is the next best thing.

Not having a down payment also means you are what Realtors call "upside down." This means the amount you financed is higher than the price of your home. So having some sort of down payment means that you will build equity in your home a lot faster.

A down payment of less than 20 percent could mean that you will need to buy private mortgage insurance, or PMI. PMI is designed to protect the lender in the event of foreclosure. For you, it means larger loan payments and a greater loan-origination fee.

Of course, if you don't have the money for a down payment or you prefer to use that money for other purposes, such as saving or investing, a larger mortgage payment is preferable to not owning a house.

If your down payment funds are being funneled off to other quarters, financial advisers say it is important to make sure the rate of return on your investment is at least equal to the amount you would save by putting down more money on your house.

Whether you are putting down 3 percent or 20 percent on your new house, the money has to come from somewhere. So where does it come from?

"People tend to put money into the things they enjoy," Mr. Jablonski says. "So I always ask them, 'Do you really need to go on that vacation this year?' or 'Why don't you sell your boat?'"

Selling off some assets can be a simple way to come up with a down payment.

No boat? In that case, Mr. Jablonski says, relatives who are willing to give you a helping hand may, in the long run, be your best bet.

"If you get a loan from a family member, you can refinance in a year or two and pay off your family," he says, "but an outright gift is even better, since lenders often consider a family loan as another loan."

Another way relatives can ameliorate your down payment problems is by sharing the equity of your house. In this case, your non-occupant relative gets a certain interest in the property. Such a plan, often arranged between parents and children, allows parents to get tax benefits and share in the appreciation of the home, while the child, of course, gets to live in the house and also accrue benefits.

Just remember to get a tax lawyer to draw up a legally binding agreement.

There are other ways to save on costs and boost your down payment. Get access to the Multiple Listing Service and find properties that are paid off free and clear, Mr. Jablonski says.

"Work the telephone," he says. "Do your homework, and you may end up saving your real estate commission. Then you can afford more of a down payment."

If you are relocating at the behest of your employer, you may find that your company will be willing to assume some or all of your down payment costs. Some employers offer employer-assisted housing programs that help ease the pressure of a down payment.

Are you someone who typically gets a large refund at tax time? Instead of splurging on that Australian vacation, you can save these funds for use as a down payment. Or, you can change your withholdings and increase the number of dependents you claim and use the extra money toward the down payment.

Life insurance can offer some options as well. If you have a whole-life insurance policy, changing that policy to term insurance should free up some cash.

If you have an individual retirement account (IRA), you can withdraw up to $10,000 to use as a down payment for a principal residence. In order to avoid tax penalties for early withdrawal, you should be a first-time home buyer or someone who has had no interest in a home for at least two years before the purchase. Funds need to be used within 120 days.

Sometimes, the seller can help you with your down payment. "Owner-carried financing" means the seller takes back some of the sale price in the form of a loan. For example, if you were to put down 10 percent of the purchase price, the seller would carry back a 10 percent second mortgage and you would get the remaining 80 percent through a first mortgage from a conventional lender.

Usually, such owner-carried financing arrangements are popular in areas where interest rates are high. However, they also can be used at other times for tax purposes or when the loan carries an attractive interest rate.

In much the same way, an 80-10-10 plan allows you to lessen your down payment while avoiding PMI. For an 80-10-10, you finance an 80 percent conventional loan, put down 10 percent as a down payment and get a 10 percent second mortgage from a source that could include the seller or the initial lender. Such secondary financing usually comes in the form of a short-term balloon loan payable three to five years after origination.

"There are a variety of different ways to get you into your house," Mr. Jablonski says. "You just have to weigh your options and think about what you are willing to give up."


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