Down Payment Dilemma : Money to Buy First House Often Tough to Find
Twenty years ago, ABC aired a short-lived television game show called “Dream House.” If contestants survived seven rounds of answering trivia questions, they got the home of their dreams.
These days, you still may have lots of questions to answer before you get your dream home, especially if it is your first one--except that the questions often have very elusive answers.
Like how do you save money for the sizable down payment that lenders require when most of your take-home pay is eaten up paying rent, taxes, child-care costs, soaring car insurance premiums and other expenses? And how do you put down 10% to 20% in an area such as Southern California, where home prices are increasing faster than incomes as they have in most areas of the nation?
A home may be the single biggest investment you will make in your life. Yet buying a first home has become an increasingly frustrating experience, particularly for many young people, to the point where state, local and federal lawmakers, as well as employers, are scrambling for innovative solutions.
Saving Often Not Enough
Unfortunately, however, such innovative programs are not yet as widely available in California as they are in other states--even though it is harder for Californians to afford down payments than in many other parts of the nation.
“The down payment dilemma is the worst it’s been since the Great Depression. We are living in a situation today where the average 30-year-old man or woman who wants to buy a house is being asked to put up 50% of their annual income for a down payment,” says David Schwartz, a political science professor at Rutgers University who serves as chairman of the National Housing Institute.
The simple, most familiar ways may not be workable for you. They usually include saving the money, finding relatives who can kick in to help or putting up a lower percentage of the price as a down payment in exchange for higher monthly payments.
Saving is difficult considering that Americans typically save only 4% to 10% of their income. To buy a $150,000 home--about the median sale price now in California--could require about $34,000 for a down payment, closing costs and points charged by banks to write a mortgage.
Money from family members is a possible source, but Uncle Phil may not always want to contribute. And paying 10% down requires private mortgage insurance, which raises the monthly payments.
As a result, some states are working on ways to help first-time home buyers come up with the money, especially those with low or moderate incomes (usually defined as 80% or less of an area’s median family income).
California Program
California operates a “Home Mortgage Purchase Program” through the California Housing Finance Agency. Generally, the program allows people to buy a home with a minimum down payment of 5%, which can be as low as 3% if the loan is backed by the Federal Housing Administration, or FHA.
The program is only for first-time home buyers with low to moderate incomes. There also are limits on loan amounts.
For example, to qualify in Los Angeles and San Diego counties, a household’s income cannot exceed $38,600 a year. In Orange County, annual household income cannot exceed $46,500. The maximum amount the agency will finance is $129,900 in Los Angeles County, $136,400 in Orange County and $119,000 in San Diego County.
For more information, call the agency’s Los Angeles office at (213) 736-2355.
The finance agency also is working on another program to be introduced soon for home buyers in rural and very-low-income areas.
In November, California voters will consider a bill authorizing $450 million in general obligation bonds designated for a variety of housing purposes, one of which is assisting low- to moderate-income buyers of first homes.
Some other states, such as Connecticut and Minnesota, have enacted innovative down payment assistance programs for first-time home buyers with low or moderate incomes. Typically, newer state programs provide for the issuing of a so-called soft second mortgage--to finance the down payment--that carries a small interest rate or none at all. Payments often don’t have to be made for five years or more.
One source of funds you may soon be able to tap easily is retirement money. Workers often have accumulated large amounts of money to spend in their retirement, but cannot withdraw any of it until they are nearly 60 without paying substantial penalties and taxes.
Bill Unlikely to Pass
Proponents of programs to ease restrictions argue that buying a first home and building equity in the house is tantamount to investing for your retirement. They argue that a first home should be treated as an alternative to investing retirement money in stocks, bonds, mutual funds and other investments.
One bill sponsored by state Rep. Robert J. Lagomarsino (R-Ventura) would allow you to withdraw money accumulated in individual retirement accounts tax free as long as it is used to buy a first home. The bill, introduced last year, is unlikely to pass this year but has been gaining support, an aide to Lagomarsino says.
Your employer may allow you to use money from your company retirement plans for down payments, although there are often penalties and taxes to pay. You probably will have to make a very good case before being allowed to withdraw the money.
Carter Hawley Hale, the Los Angeles retailer that owns the Broadway stores, allows employees to withdraw money from its profit-sharing plan for hardship reasons, one of which includes buying a home. But, a company spokesman adds, money withdrawn is taxed at ordinary income rates and is assessed a 10% penalty.
Your employer may offer home-buying assistance as an employee benefit. Colgate-Palmolive in New York will pay the points on loans of up to $133,250. Above that, employees have to pay one point, or 1%, of the total amount of the loan.
At the University of Pennsylvania, permanent employees buying homes are offered private mortgage insurance that, in some cases, allows them to buy a home with no down payment.
In general, federal programs are lacking, except for traditional ones that probably won’t apply to you.
In some areas of the country, home buyers are still easily able to buy a house with a loan backed by FHA, which often requires a down payment of 5% or less. In the Los Angeles region, however, the maximum loan amount guaranteed is $101,250 for single-family homes, well below what most homes in Southern California cost.
Veterans have long had programs available to them. Financial institutions generally will lend up to $144,000 under the Veterans Administration program with no down payment to qualified applicants.
Some cities have started programs as well. In New Brunswick, N.J., the city has financed the building of homes using tax-free bonds. The homes are then leased to people with an option to buy. Their monthly rent payments go into a fund, which they eventually use toward a down payment.
