Variety of Loans Allow Low-Down Payment Home Buys

Juan Jimenez didn’t think he could afford to buy a home. He didn’t have much of a down payment and his income as a meat cutter isn’t exactly a princely sum.

Jimenez, his wife, mother-in-law and four kids were feeling more than a bit squeezed in a rented two-bedroom home. Now, they’re able to spread out in their recently purchased four-bedroom, three-bath house in Oxnard.

Less than 10% down was all it took for the Jimenez family to become homeowners. They paid $169,000 for the house and came up with $14,000 to cover the down payment, closing costs, points, insurance and the first monthly payment of $830.

Getting the loan wasn’t easy, Jimenez recalled. They were turned down by the first lender they approached, but eventually, California Federal Bank approved the loan as part of its so-called Target ARM (adjustable rate mortgage) program, which offers low down-payment loans to low- and moderate-income buyers in select low- and moderate-income neighborhoods.

To save the down payment, “we were only eating rice and beans for months,” Jimenez said. “The house isn’t going to come to you,” he said. “You have to make sacrifices.”

Thanks to a diverse group of programs offered through lenders, developers and government agencies, it’s possible for many would-be buyers such as the Jiminezes to achieve home ownership with little or no down payment--and the stalled prices in the housing market help too.

The Target ARM program offered by several lenders, including Cal Fed, allows some low- and moderate-income buyers to get into a house or condo with as little as 5% down. Low- and moderate income for a family in Los Angeles County is $51,600 and about $58,000 in Ventura County as determined by federal guidelines. Households below these targets can qualify for low down-payment loans if they buy in an area that is considered low- or moderate-income by the U. S. Census, said Christina Sutherland, first vice president at California Federal Bank. Cal Fed isn’t offering this program in the San Fernando Valley, she said, but it is available in some parts of Ventura and Oxnard.

There’s also the Fannie Mae-sponsored Community Home Buyer’s Loan Program that is offered through many local lenders. Low- and moderate-income buyers can borrow up to about $140,000 in L. A. County and up to about $155,000 in Ventura County toward the purchase of a home. Five percent down is all it takes, and two-fifths of that down payment can be a grant, gift or unsecured loan. Borrowers must take a class in budgeting and borrower responsibility to qualify.

Closing costs may be paid by the seller, Sutherland said, and underwriting guidelines are flexible. With conventional loans, lenders generally limit housing costs to 28% of a borrower’s gross income. Through Fannie Mae, lenders are able to stretch that to 33%. Lenders also like borrowers to have a two- or three-month reserve for payments of mortgage principal, interest, taxes and insurance. But the special loan programs are less insistent on these reserves.

Veterans can qualify for Veterans Administration-backed loans of up to about $184,000 with basically no down payment at all. A certificate of eligibility from the VA is required. Federal Housing Administration mortgages of up to $151,725 are also available to all buyers with a down payment in the 3% range.

Developers and some lenders who also happen to own real estate are offering special low down-payment incentives too. At WillowCreek Village in Lancaster, for example, the developer, a subsidiary of Commercial Center Bank in Santa Ana, is offering a rent-to-own program that allows would-be buyers to move in for as little as $1,500.

The 168 townhomes at WillowCreek range in price from $89,000 to $92,000, said Anthony McDemas, sales manager. Despite the moderate prices, “down payment is overwhelmingly the biggest obstacle for first-time buyers,” he said. To overcome the problem, would-be buyers pay rent for the first few months and the developer matches those rent payments and places the matching funds in an escrow account that grows until it becomes weighty enough for a down payment. The monthly payments range from $710 to $885 per month, depending on the unit, and the total down required is about $5,000.

John Bercsi, loan officer at Metrociti Mortgage Corp. in Encino, is working on a loan package for would-be buyers at a condo project in Calabasas. In exchange for a higher-density zoning, the developers agreed to set aside 14 out of 42 units for low- and moderate-income buyers, Bercsi said. Loans on the $120,000 to $130,000 units will be available to buyers with a 5% down payment. The catch, however, is a 20-year restriction that limits the resale price of units to the original purchase price, adjusted for increases in the cost-of-living index.

Another strategy is for the buyer and seller to create an AIDT--all-inclusive deed of trust--whereby the seller remains officially responsible for the original loan. These AIDTs, also known as wrap-around loans, can run afoul with some lenders who insist at some point on enforcing the due-on-sale clause that requires borrowers to pay off a loan when the property is sold. Some sellers are also wary of just letting a buyer take over payments when the seller still remains liable for a default by the buyer.

Some buyers unfortunately resort to less than scrupulous tactics to get a low down-payment loan. These buyers inflate the sales price of a home while striking a secret deal with the seller to take back a second mortgage. A $160,000 sale might be represented to the lender as a $200,000 deal. The lender then makes a $160,000 loan with a $40,000 down payment. The only problem is that the $40,000 is coming from an under-the-table loan made by the seller.

Lenders who catch borrowers fraudulently mortgaging their homes to the hilt are increasingly apt to prosecute for fraud. “They turned a blind eye to it in the 1980s,” Bercsi recalled. Now lenders are doing post-funding audits and selective spot checks. Because these tactics are neither ethical nor legal, they’re not recommended.

Buyers can, however, get sellers to raise the price of a home and then pay for all non-recurring closing costs. This helps buyers get a slightly bigger loan and pay for upfront costs over the term of the loan.