In today’s booming real estate market it’s difficult for many young families and single people to save enough money for 10 – 20% down, or to qualify for large mortgages with poor credit. We spoke to mortgage and real estate professionals to get tips on how to achieve the American dream of home ownership.
“There are a number of different ways to purchase a home today that you would have never thought possible,” says John Dibs from Re/Max Liberty in New York City. Government sponsored programs are a good resource for lower income buyers, buyers with damaged credit, and buyers with limited cash resources.
An option for young people who have not yet had the opportunity to make a lot of money for down payments is 100% or 106% financing. “A young couple making $75,000 a year in a metropolitan area can’t possibly save the hundreds of thousands of dollars necessary to buy a house in today’s market,” says Jeff Martin, sales and development coordinator with Sterling National Mortgage Company. “Programs exist for people who qualify to make monthly payments on a home but don’t want to wait the years and years it would take them to save for a down payment and closing costs.” These loans take into account the value of the home, and the potential value in years to come, and allow borrowers to use that value to back up a loan.
The Federal Housing Administration (FHA) helps qualified buyers by supporting bank loans. They require a minimum down payment of 2 3/4%, and you can finance all of your closing costs, keeping your out-of-pocket expenses for purchase to a minimum.
Unlike banks and mortgage companies, the FHA also allows for cosigners on a loan who will not be living in the house. This opens the door for help from parents and other family members who don’t plan on residing with you.
The FHA is likely to overlook somewhat damaged credit, approving those who may not normally qualify for high mortgages. They are also more lenient when it comes to debt-to-income ratios, the percentage of all the debt you will carry with the home loan in comparison to the money you earn. The average debt-to-income ratio considered “safe” is 36% (28% for housing and 8% for all other debt). The FHA will often allow as much as 41%, which helps people with lower incomes afford more expensive homes. They are, however, very strict when it comes to the condition of a home. Home loans backed by the FHA must have an appraisal that proves the home is in good condition.
“There are also low- to moderate-income programs sponsored by many banks”, says Jeff Martin. “In 1977, Congress passed the Community Reinvestment Act (CRA), which mandated banks to lend money into their communities.”
CRA was originally intended to help rebuild inner-city areas, but the act was broadened in 1995 to include suburban areas where there is a low- to moderate-income (LMI) concentration.
“Almost every bank in America has a pool of money they are required to lend to these types of clients. If the home you are buying falls into one of these LMI tracts you may qualify for enhancements, including reductions in interest rates, acceptance of bruised credit, and lower down payments. They’re very flexible because what they want is to lend money to people to reinvest in the community to help make that community better.” Mr. Martin also advises potential buyers to do some research on CRA to find out if you can qualify for additional assistance, including closing cost grants and unsecured loans.
Keep in mind that your household income usually needs to amount to less than 80% of the median income for the area in which you want to purchase a home to qualify for these types of programs. FHA helps anyone, anywhere who lacks cash resources. CRA is designed for specific communities that are in need of redevelopment.
Mr. Dibs recommends interest-only and non-conforming loans. “These specialty loans start with very low interest rates – some at fewer than 2%. You do, however, have to beware of negative amortization.”
“With negative amortization you ultimately owe more money than you borrowed, because you’re not paying principal right away,” says Jeff Martin. “The principal amount you don’t pay during the first few years is added on to your overall loan. You can get into a lot of trouble if you don’t treat it carefully.”
Mr. Martin warns that a downturn in the real estate market could leave those with no equity in their home owing a lot more than the house is actually worth. “I would be careful about them for people who are making low or no down payments.”
All of this information can seem very overwhelming, especially for first time buyers. It’s important to do your research and find a mortgage professional that you’re comfortable with. He or she can accurately assess your financial situation, what you can afford, and how much risk is wise to take.
John Dibs from Re/Max Liberty in NYC and Jeff Martin from Sterling National Mortgage Company contributed to this article.