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Making the American Dream a Reality

How to help buyers clear the down payment hurdle

By Michele Lerner

For more information about buying a home or property please visit our Buyers Page, for helpful information on selling your home please visit our Sellers Page. If you have any questions about anything or would like more information on anything Contact Us. If you would like to know more information about the areas that we specialize in please visit our About Virginia page, About Falls Church page, About Fairfax County page, About Springfield page, About Arlington page, or our About Alexandria page.

Gathering the funds for a down payment, closing costs and moving expenses, typically the biggest obstacle faced by first-time homebuyers, can sometimes be so daunting to renters that they avoid any attempt at homeownership.

Potential buyers may already know about low down payment options such as FHA loans, but agents can also offer information about other loan programs and rules about gift contributions. Recommendations for a savings plan, borrowing from a 401(k) and even wedding registries for a home purchase may be welcomed by some prospective buyers.

Government Loan Programs: A Favored Option for Many

“VA loans are still the best program out there for veterans, active military members and retired and active National Guard members,” says Rick Eul, sales manager for Northern Virginia with Homestead Funding in Vienna. “Don’t assume that VA benefits aren’t available because you never know who might qualify. I recently worked with an army nurse who didn’t realize she qualified for a VA loan.”

Bill Tessier, assistant vice president and real estate agent liaison for Navy Federal Credit Union in Vienna, says that about 45 percent of all their mortgage loans are VA loans, which require no down payment. VA loans also allow seller concessions to help pay for the funding fee and closing costs.

“In some cases, VA loan borrowers can even get cash back at settlement if they made an earnest money deposit,” says Tessier.

Another less well-known option with zero down payment financing is a USDA Rural Development loan.

“USDA loans are based on a property address, and contrary to what most people think, they are sometimes available in areas that are somewhat built up,” says Brad Carter, senior vice president of sales for Weichert Financial Services in the Capital Region. “These may be available in places like Warrenton, Front Royal and Gainesville, for example.”

USDA loans are also limited by income and home price. They do not require mortgage insurance, but they do have a loan guarantee fee that may be wrapped into the loan balance.

In Northern Virginia, first-time homebuyers, defined as anyone who has not owned a home in the previous three years, may be eligible for a Virginia Housing Development Authority loan.

“VHDA offers affordable loans at rates that are slightly below market rates, including an FHA Plus loan, which is a second trust for 3.5 to 5.5 percent of the sales price,” says Carter. “The VHDA loan alleviates the burden of cash requirements for first-time buyers.”

Currently the maximum gross household income to qualify for a VHDA loan is $120,900 for a family of two or less in Northern Virginia and $140,000 for a family with three or more. The maximum loan amount is $450,000 including both the first and second trusts. Borrowers must meet credit standards, take a homebuyer education class and be purchasing the home as their primary residence.

FHA loans, which require a 3.5 percent down payment, are not only popular because of their low down payment requirement, but also because of lenient rules on gift funds.

“The entire down payment can come from a gift from an immediate family member,” says Carter. “In addition, FHA loans allow up to 6 percent of the sales price in seller concessions, so that can be used to cover closing costs that are about 4 to 4.5 percent, plus to buy down the interest rate a little.”

Eul points out that while FHA loans can be the right loan product for borrowers with a lower credit score, the mortgage insurance premiums that are required for all FHA loans have tripled in recent years. In many cases, conventional financing could be less costly than an FHA loan in terms of monthly payments, even if the borrower on a conventional loan must pay private mortgage insurance. However, while there are some exceptions, most conventional loans require a minimum down payment of at least 5 percent.

“Conventional loans with a down payment of less than 20 percent require that at least 5 percent of the down payment come from the borrowers’ own savings,” says Eul. “If the down payment is 20 percent or higher, the entire payment can be a gift.”

Gift funds must be accompanied by a letter from the gift-giver that provides sourcing for the funds and expressly states that repayment is not expected.

Pete

Conventional Financing: Low Down Payment Options do Exist

While not all lenders offer them, some banks and credit unions have their own low or zero down payment loan products.

“There are lots of great financing options available, but this is not a return to the days of easy credit,” says Carter. “You have to qualify with a good credit score, bank statements and employment verification. It’s not hard to qualify for a mortgage; you just have to make sure you can truly afford that house now and in the future.”

Navy Federal offers a zero down payment mortgage for its members up to $1 million, says Tessier.

“Our loan is tailored after VA loans, but does not require a certificate of eligibility,” says Tessier. “The funding fee is 1.75 percent of the loan amount. There’s no mortgage insurance requirement, but we won’t finance above 100 loan-to-value. So either the borrower pays 1.75 percent out of pocket, or they can make a down payment and we’ll finance the fee.”

Navy Federal allows gift funds of up to 3 percent of the sales price as well as seller concessions of up to 6 percent of the sales price. About 50 percent of Navy Federal’s conventional mortgage loans are 100 percent loan-to-value loans.

“Many banks and credit unions offer low down payment or 100 percent financing products, but they are often limited by income and by loan amount,” says Eul.

Such loans are often available to borrowers with good credit who meet maximum debt-to-income ratios and have an income of 80 percent or less of the median local income. The maximum loan amount in the Washington, D.C. area for these loans is often $417,000. The advantage of these loans for borrowers who qualify is that they typically do not require mortgage insurance, thereby reducing the monthly payments compared to an FHA loan. Both B.B. & T. and SunTrust are among financial institutions offering these home loans.

Cash Accumulation Strategies

Borrowers who do not qualify for a zero down payment loan and who don’t have the option of a large gift from relatives will need to come up with other ways to accumulate more than $10,000 for a 3.5 percent down payment on a $300,000 home.

One unusual way to gather cash for a down payment is a wedding registry. Some engaged couples and newlyweds may feel shy about asking for what they need most to establish their new household: cash. A wedding registry lets the couple post photos or messages about their dream and then allows friends and family members to donate directly through the site.

Dana Ostomel, founder of DepositAGift.com, says, “The reality is that it’s taboo to ask for cash, but it is ultimately the preferred gift. Many people like the idea of their guests helping them save for a down payment so that when the time is right they will be ready and able to set down roots – the ultimate wedding gift.”

Of the more than 1,000 wedding registries she has established in the Washington area, Ostomel says that about 15 percent are for down payment funds and another 15 percent are for home improvements such as a new roof. The average registry accumulates $5,000 to $10,000.

“In order to allow gifts from a wedding registry to be used as down payment funds, the borrower would need to provide a letter of explanation for the funds and a marriage certificate with the date,” says Eul. “As long as someone can prove that the funds are truly a gift, there shouldn’t be a problem.”

If registry recipients wait 75 to 90 days after they receive the money to apply for a mortgage, the money will be considered theirs, says Eul.

“Most lenders require two to three months of bank statements to check on income and assets,” says Eul. “If the borrowers wait until the money has been seasoned a few months, then there won’t be any need to provide proof of where it came from.”

Prospective homebuyers may also want to consider borrowing down payment funds from their 401(k).

“Borrowing down payment funds from your 401(k) is allowed, but I would caution borrowers to find out the repayment terms,” says Carter. “Your repayment requirements will be included in your debt-to-income ratio, so you need to make sure you can afford the payments. You need to do a cost-benefit analysis to make sure it is worth it.”

Eul says that FHA loans do not count 401(k) repayments as part of the debt-to-income ratio, but conventional loans do.

“There are no penalties for the withdrawal if you use the money to buy a house, but you must find out what the consequences are if you leave your company before you repay the loan,” says Eul.

While the process can sometimes be slow, an old-fashioned savings plan is highly recommended by lenders for both the cash benefit and the discipline of living on a budget.

“At Navy Federal, we are proponents of people establishing a systematic savings plan,” says Tessier. “While gifts and seller concessions are fine, we don’t want anyone to jeopardize their financial status by not having savings in the bank and proving that they can live within a budget.”

Tessier says Navy Federal has a budgeting counselor on staff to assist members. He also says that homebuyers can boost their savings with an income tax refund, a bonus or perhaps selling a car or other items.

Some prospective buyers may want to add a second job or earn extra money with overtime to increase their savings faster.

“While a second job can be a great way to accumulate more funds in the bank, the income from a part-time job cannot be counted as part of the borrower’s income for at least two years,” says Eul. “Some people in the past have taken on a second job to lower their debt-to-income ratio for the loan qualification and then quit once they got into their house. But it’s a great idea if you just want to put some extra cash into your savings account.”

Eul has other recommendations for prospective buyers.

“If you plan on buying within a year, you can raise your deductions so your paycheck is larger and put the extra money in your savings account because you’ll get a write-off for the mortgage interest deduction,” says Eul. “You can also make a lifestyle change, packing your lunch, eating at home, cutting back on Starbucks and being careful to use your bank’s ATM to avoid ATM fees.”

Eul suggests talking to a lender before deciding to pay off debts.

“I’ve seen buyers who have paid off all their credit card debt but then don’t have any cash for a down payment,” says Eul. “They might be better off keeping a little bit of debt and saving their money for a little while instead.”

One common suggestion from lenders is for buyers to save the difference between their rent and their prospective mortgage payment to build their savings and to adjust to a more costly housing payment. However, Carter points out, with rents in Virginia rising and mortgage rates so low, some renters may find their monthly payments are the same or lower when they buy.

For more information about buying a home or property please visit our Buyers Page, for helpful information on selling your home please visit our Sellers Page. If you have any questions about anything or would like more information on anything Contact Us. If you would like to know more information about the areas that we specialize in please visit our About Virginia page, About Falls Church page, About Fairfax County page, About Springfield page, About Arlington page, or our About Alexandria page.