HOME BUYERS FAIR : Buying First Home : Compromise Is Key to Cracking Southland Market : Financing: Even moderate-income households have many ways of making dream of homeownership a reality.
Judy Burnfield’s dream home is perched atop a hillside overlooking the Pacific. The front porch has a swing, the back yard has a barbecue and Jacuzzi. A picket fence circles her spacious yard.
But for now, her dream home will have to remain just that--a dream.
When the 27-year-old physical therapist went shopping for her first house last year she learned how hard it is to buy even a modest home in Southern California.
“I couldn’t even touch a single-family home with my income,” said Burnfield, who makes about $36,000 a year. “I knew prices were high, but I didn’t know they were that high.”
Undaunted, Burnfield turned to the less expensive condominium market. Many condos were also out of reach, so she again downsized her expectations and settled on a small $136,000 unit in Long Beach that she could buy with her down payment of about $15,000.
“It’s not my dream home,” she said, “but at least it’s a start.”
Burnfield has done exactly what real estate experts advise other would-be buyers: Sacrifice, scrimp, stretch your budget, scrape up the money for a down payment any way you can, but buy something--anything--now.
And of all the words of advice the experts offer first-time buyers, the most common is compromise.
“You’ve got to be realistic,” said David Carden of Century 21/A Marketplace Realty in Long Beach. “You’re not going to get your dream home the first time out, but you need to get something now.”
A family trying to buy California’s median-priced single-family home of about $200,000 would need a household income of more than $64,000 to qualify for a fixed-rate loan, according to the California Assn. of Realtors.
And that’s assuming the buyer has a 20% down payment of nearly $40,000, which few first-timers have.
Although many would-be buyers prefer fixed-rate loans, adjustable-rate mortgages offer some important advantages. The biggest: It’s usually easier to qualify for an ARM because such loans start out with a below-market rate, which means the borrower doesn’t have to earn as much.
Most lenders offer several different types of mortgages, many of which are geared toward first-time buyers. Experts advise contacting at least six lenders and mortgage brokers to see what type of loans are available and comparing the loans offered by each.
In fact, experts urge buyers to have a realtor and lender “pre-qualify” them before they even start house hunting. This allows buyers to get a good idea of how big a loan they can get, based on the size of their down payment, annual income and other factors.
“By pre-qualifying, you’ll know how much home you can afford, so you don’t waste time looking at properties that are too expensive,” said Steve Scheinwald of Syvia Miller Realty in Rancho Mirage.
Although budgets may be tight in the early going, experts say most people don’t need to worry too much about it.
“If you’re upwardly mobile and expect your earnings to grow in the future, don’t worry about stretching your finances a little,” said Harriet Clune of Jon Douglas Co.’s Ventura office. “That mortgage payment that seems so hard to make today will seem a lot smaller a year or two from now.”
Would-be buyers also should think of ways to pay off outstanding debt or increase their down payment to get a bigger loan or nicer home.
Personal assets--paintings, stocks, cars--can be sold, life insurance policies can be converted into cash, or perhaps retirement plans can be tapped.
Also see whether your employer or union will provide financial help.
Of course, there’s also the old-fashioned way of raising cash: Get it from the folks. About one-third of all first-time buyers get a gift from their parents, according to the National Assn. of Realtors in Washington.
Even parents who don’t have much cash can help their children buy a house by agreeing to co-sign the loan application. The added financial strength can make a lender more willing to make the loan.
Increasingly, many experts said, financial help that parents give to their kids comes with strings attached.
Among the most common are so-called “equity-sharing” agreements, in which both the parents and children own an interest in the property and agree to split the profits when the home is eventually sold.
If equity-sharing isn’t appealing, cash-short buyers can look for sellers willing to help with the financing.
Seller financing typically involves the use of a second mortgage, usually called a seller “take-back” or “carry-back.” For example, if a couple wants to buy a $125,000 home but can qualify to purchase a $115,000 house, the seller can take back a $10,000 second mortgage to complete the sale.
Sellers willing to provide financing usually say so in their newspaper ads, often by using the letters OWC for “owner will carry.”
Another alternative for buyers with small down payments: Search for a home financed with an assumable loan.
A buyer who assumes a seller’s mortgage usually puts up cash equal to the amount of the seller’s equity and then takes over the monthly payments. For example, a seller who had $10,000 equity in a $130,000 home might let the buyer assume the loan if the buyer put $10,000 down and agreed to take over the payments.
Buying a lower-priced condominium or townhouse is yet another option. “It means giving up some privacy, but at least you’ll get some appreciation and tax deductions,” said Colleen McFarland, branch manager of the Coldwell Banker office in Riverside. “That’s a lot more than you can say about renting.”
Other experts are not as high on condos, claiming they don’t appreciate as quickly as single-family houses.
“If I had a choice between a condo in good shape or a single-family home that needed work, I’d buy the single-family home and gradually fix it up,” said Chuck Cusumano, owner of Burbank-based Gem Realty.
The most promising fixer-uppers are often found in older areas that show signs of revitalization, such as a flurry of new construction projects or remodeling jobs.
Once a promising area has been located, buyers should search out homes that need only cosmetic improvements, such as fresh paint, new drapes or carpeting, and other relatively cheap repairs.
Of course, there’s an easier answer: move to a less expensive area.
“Our average price is less than half that in L.A., Orange County or San Diego,” said Linda Crowell, owner of Century 21/Action Realty in San Bernardino. “Riverside is also a lot cheaper than homes near the coast.”
Half of the existing single-family homes in the Riverside/San Bernardino area sell for less than $130,884, according to the California Assn. of Realtors, which puts that market well within the grasp of most first-time buyers.
Moving inland to take advantage of lower home prices doesn’t necessarily mean two- or three-hour round-trip commutes to a job in the coastal counties each day, thanks to the Inland Empire’s fast-growing business community.
Borrowers who move to less expensive areas can low down payment loans insured by the Federal Housing Administration.
FHA loans require a minimum down payment of about 5%, and usually have a fixed interest rate that’s slightly below those of conventional mortgages.
The maximum FHA loan limit in most parts of California is $124,875. As a result, the program isn’t viable in most of the pricey coastal areas but is extremely popular in the less expensive Riverside and San Bernardino markets as well as in Palmdale, Lancaster and other parts of north Los Angeles County.
Armed forces veterans are eligible for the no-money-down loan program operated by the Veterans Administration, while California veterans are especially attracted to loans available through the California Department of Veterans Affairs.
Despite the good financing offered by the FHA and VA, some borrowers who use the program can’t make ends meet and fall into foreclosure. Those foreclosed properties are then resold, often at discounted prices or with attractive financing.
The U.S. Department of Housing and Urban Development, which administers the FHA program, and the VA advertise their foreclosures in newspapers. Their ads appear in The Times’ classified advertising section on Sundays.
Many Southland lenders also offer foreclosed properties and typically offer them at discounts ranging from 5% to 15%. Down payments can be as low as 5%, or the lender may offer a below-market interest rate on the loan.
Information about foreclosures can be obtained by calling lending institutions and contacting local realtors. Some companies, such as the West Los Angeles-based REO Register, sell lists of foreclosed properties in different areas.
So what about the people who want to buy property, but refuse to compromise their standards or don’t want to spend the time tracking down the best bargains?
“I’d ask them whether they’d consider investing in real estate with somebody else,” said Kevin Hutchings, a vice president in the Woodland Hills office of James R. Gary & Co. Ltd.
“If they did, they’d probably make more money than they would by putting their cash in the bank. After a couple of years, they could sell the property and use the profits as a down payment for a home of their own.”
As an example, say two people each put up $10,000 to buy a $200,000 home with a 10% down payment of $20,000.
If property prices rose 10% annually for each of the first two years, the home would be worth about $242,000 and each of the investors would have about $31,000 equity.
Their overall return would be boosted by tax deductions they could take for mortgage-interest payments, property taxes and, if the home was rented out, depreciation and other write-offs only landlords can take.
“It’s never been easy to buy a first home, and it’s not going to get easier any time soon,” said Linda Orr of Real Estate Marketeers in Irvine. “So my advice is to buy anything you possibly can.
“Beg to do it, borrow to do it, steal to do it,” Orr said. “Just do it.”
This article is condensed from a longer version that was published in May , 1989, in The Times’ Real Estate section.
