Down Payment Hurdle: It Need Not Be Loan Obstacle
While the nation’s hot housing market has long been grabbing headlines and spawning tales of buyers getting into bidding wars for homes, some lenders say there’s a new trend that has only recently appeared: More real estate deals are falling out of escrow because the buyers can’t qualify for a loan.
It’s a heartache most buyers can avoid simply by doing a bit of arithmetic and by talking with a realtor or lender before they start hunting for a new home.
“If you know what the lender is going to look for when he goes over your application, you won’t waste time looking at houses you can’t afford,” said Glen Crellin, an economist for the National Assn. of Realtors.
The size of the down payment and the ratio between the borrower’s income and debt obligations are key factors that determine the size of a loan a buyer can get.
“Coming up with a big enough down payment is the biggest problem for most first-time buyers,” Crellin said. “It gets a little harder every time home prices go up.”
Still, there are literally dozens of potential sources of cash that can fill the gap between a buyer’s savings and the size of the required down payment.
The Federal Housing Administration, Veterans Admistration, California Housing Finance Agency and California Department of Veterans Affairs all operate loan programs for borrowers who can put little or nothing down.
Borrowers who aren’t eligible for such programs can usually get financing for a low down-payment deal by purchasing private mortgage insurance (PMI).
The policy will reimburse the lender for at least part of its losses if the loan eventually goes into default, a safeguard that makes lenders more willing to finance sales involving down payments of less than 20%.
Parents might also be willing to help close the gap. “Roughly 31% of all first-time buyers get a gift or loan from their folks,” Crellin said. “Asking your parents for help is nothing to be ashamed of.”
Buyers who already own a home and are “trading up” into a larger, more expensive house usually have more flexibility when it comes to making a down payment because they’ll get a big check when they sell their current home. This gives them the opportunity to tailor the size of their down payment to fit their overall financial game plan.
For example, trade-up buyers might wish to put 20% down or more to keep their monthly payments low, said Eugene A. Crane, head of residential lending for Beverly Hills-based Great Western Bank.
A large down payment, combined with a 15-year loan term, may make especially good sense: The monthly payment will likely be between 20% and 30% higher than a loan amortized over 30 years, but the home could be paid off before dependents start college or the borrower retires.
Conversely, a 10% down payment may be better if the borrower can invest the remaining cash more profitably elsewhere, or if a large amount of tax deductions for mortgage-interest payments is desired.
Borrowers who put 20% down are usually allowed to devote up to 28% of their gross, pretax monthly income toward housing expenses, but housing expenses and all other debt obligations won’t be allowed to exceed 36% of gross income.
Borrowers with 10% down are usually allowed to put only 25% of gross income toward housing expenses, and total monthly debt payments can’t exceed 33%.
Buyers who can’t meet these “debt ratios” have several options. They can look for another lender that uses less restrictive guidelines, although they’ll likely be charged a slightly higher rate.
An adjustable-rate mortgage may be particularly attractive if the ARM’s low introductory rate makes it easier to qualify for the loan, or if the low rate allows the borrower to get a bigger loan and nicer home.
Parents or other relatives may be willing to help pay off enough of the borrower’s other loans to meet the lender’s ratios, or they can co-sign the loan application.
“The extra financial strength usually makes a lender more willing to make the loan,” said Tom Criser, a vice president at Van Nuys-based Valley Federal Savings & Loan.
It might also be possible to meet the ratios by refinancing auto and student loans, plus any other debt obligations, with one brand-new loan that will be paid off over several years.
“By stretching your payments out over a longer period of time, you might be able to get your total monthly debt payments down to a level that’s acceptable to the lender,” said Crane at Great Western.
Several of the sources listed in the accompanying chart could be tapped to pay off outstanding debt or to increase the size of the down payment, making the lender’s debt ratios easier to meet.
“But the simplest solution is to look for a smaller, less-expensive home,” economist Crellin said. “The smaller monthly payments will be easier on your finances.”
Would-be home buyers can usually get a good estimate of how much money they can borrow by asking their realtor, Crellin said, or by visiting with lenders.
Some lenders are even willing to issue a “pre-approved” mortgage, which commits the institution to loaning a certain amount when the borrower finally selects a home. Buyers who already have their financing lined up have an advantage when they’re competing against other bidders for the same house, although some lenders have the power to renege on such commitments under certain circumstances.
SOURCES OF FINANCING
Possible sources of cash for raising a down payment or lowering debt ratios
1. Loan or gift from parents.
2. Getting a co-signer for the loan.
3. Sale of personal assets or securities.
4. Loan secured by personal assets or securities.
5. Withdrawal from retirement plan.
6. Cash value of life insurance.
7. Second mortgage from seller or other lender.
8. Private mortgage insurance.
9. Low-down FHA, CHFA or VA loan.
10. Institutional loan to consolidate other debt and lower monthly payments.
11. Refinancing, or borrowing against, other real estate.
12. Lowering withholding allowances to increase monthly take-home pay.
13. Personal, unsecured loan from a lender.
14. Computerized loan networks to find best terms.
15. Securing a business loan.
16. Refinancing automobile.
17. Accumulating more funds between time of purchase and time escrow closes.
18. Doing repairs in exchange for lower down payment or sale price.
19. Getting agent to take commission in form of note instead of cash.
20. Taking a second, temporary job.
21. Renting with option to buy.
22. Using income tax refund as part of down payment.
23. Special loan programs offered by employer.
Source: National Assn. of Realtors