Q: Over the last 18 months or so, I’ve been anxiously watching the TV and Internet news document the decline of home values. Now that it’s finally a buyer’s market, I feel like it would be a good time for me to buy, but my mortgage broker just told me that there are no more 100 percent financing options — I would have to come up with a 5 or 10 percent down payment in order to buy a home now. What good does it do to have a buyer’s market if you have to have a huge amount of savings in order to buy?
A: Current market dynamics are very frustrating in that they seem to present a Catch-22. For the first time in years, buyers have many more homes to choose from, favorable interest rates and superior negotiating power vis-à-vis sellers. Simultaneously, though, the subprime mortgage market debacle has resulted in a virtual desert of low- and no-down-payment options. Many buyers who were waiting to buy have been devastated to realize that 100 percent financing is simply not available the way it used to be. Lenders have realized that the vast majority of the homes that ended up in foreclosure were homes that were financed with very little or no money down, and that requiring buyers to put some of their own skin in the game, so to speak, greatly reduces the chances that they will later just walk away from their home.
First things first — make a commitment right now to move out of a place of frustration and feeling "stuck" into a place of action. Despite what you’ve been told by your mortgage broker or what you’ve seen in the news, there are options available for buyers with good credit who don’t have much in their savings accounts to put down. I once heard the adage, "There are no unrealistic goals — there are just unrealistic time frames." Internally declare that you are on the path to your goal of home ownership, and start educating yourself about your options and how you can position yourself to take advantage of them, while recognizing that it could take you one month or one year (or more) to do the credit and financial work needed to buy in this current mortgage market. Align yourself with mortgage and real estate professionals who are solution-oriented and committed to giving you creative options and suggestions for how you can manifest your vision of home ownership, rather than those who will shut you down if your current circumstances don’t fit right into the qualification matrix.
Need-to-Knows & Action Plan
First, get clear on your numbers — your financials. What is your credit score? How much cash do you have in the bank? What is the worth of your liquid assets (money market accounts, CDs, etc.) and other assets (stocks, bonds, etc.)? What is your gross income (before taxes) and your net income (after taxes) on an annual and monthly basis? What are your current monthly minimum obligations (add up all the minimum payments on your credit cards, car payments, student loans, etc.)?
With this information, find a solution-oriented and creative real estate and/or mortgage broker with a coaching style. Ask your friends and family — especially anyone who you know had a tough time buying his or her home, but was successful — for a referral. During your consultation, ask them about their familiarity with government loans and/or first-time home buyer programs. When the subprime mortgage offerings virtually disappeared last year, many governmental and nonprofit programs amped up their offerings to continue to make home ownership possible to those who aren’t flush with tons of cash. Some of these programs still enable 100 percent financing — for example, many first-time home buyers are now using 97 percent FHA (Federal Housing Administration) mortgages in conjunction with 3 percent down-payment-assistance programs like Nehemiah and AmeriDream to buy a home with no money out of their pocket. Unlike the FHA mortgages of the past, which were capped with unrealistically low purchase price limits in many areas, current FHA loan limits are $417,500 in many areas and up to $727,500 in very high-cost-of-living areas.
These programs tend to be less risky than the 100 percent financing of the past because: a) buyers must fully document their income; b) FHA mortgages are fully amortized, so the loan balance goes down every time you make a payment; and c) debt-to-income ratios are more stringent, ensuring that borrowers don’t start out overburdened by monthly debt payments. On the other hand, FHA loans have high closing costs; can be tough to qualify for if you have lots of other bills; include private mortgage insurance, or PMI, (at a monthly cost of $100 to $200); and offer no payment-lowering interest-only options.
If an FHA loan doesn’t work for you, check out nonprofit mortgage programs like ACORN and NACA — these offer easier-qualifying, low- or no-down-payment options and great rates for low- and moderate-income buyers. Similarly, many cities, counties and states have first-time home buyer programs that give tax forgiveness or even cash loans or grants to help with buyers’ down payments. Depending on what you do for a living, you might qualify for a profession-specific home buyer assistance program for public employees such as teachers, police and firefighters.
In my own clientele, I’ve even seen a rise in buyers taking advantage of gifts from their parents and equity-share programs where an investor puts up the down payment in exchange for a share of appreciation later on. The potential solutions to the "no-down-payment" problem are endless if you shift into a mindset of possibility and abundance.
After you consult with your Realtor and/or mortgage broker, plan your work, and work your plan — depending on your credit, assets, lender’s requirements and financial readiness, your work may involve credit rehabilitation, taking home buyer education classes required by the first-time home buyer program(s) to which you are the best suited, or even saving some of your own money to show the lender that you are able to be financially responsible. Ownership is possible, but you must be creative and committed to buy a home with little money down in today’s market.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online.
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