Coming Up With the Cash; Tighter Down Payment Standards Force Buyers to Get Resourceful

August 23, 2008
By: Renae Merle, The Washington Post

Not so long ago, Qiana Parker wouldn't have had to give up her apartment or curtail her shoe-buying habit to save for a down payment on a house.

But in the year since the mortgage market imploded, securing a loan without money down has become much harder -- impossible in some cases. Facing growing losses, mortgage lenders and insurers are tightening standards and demanding more from borrowers such as Parker, 33, a registered nurse and the mother of a teenager.

In the Washington region, many buyers are being asked to come up with a 10 percent down payment, real estate agents and local lenders said. "Piggyback" loans that allow buyers to sidestep mortgage insurance have nearly disappeared. In May, the D.C.-based mortgage financing firm Fannie Mae eliminated its no-money-down mortgage programs.

More changes are coming. Congress recently passed legislation prohibiting down payment assistance programs that federal officials complain are more likely to fuel loans that will eventually default. Under those programs, nonprofit groups provide home buyers with money for their down payments and are reimbursed by the sellers. That provision goes into effect Oct. 1.

All this has left buyers scrambling for cash or reconsidering how much they can afford to pay for a house. Many are opting for Federal Housing Administration loans, which allow for a down payment of just 3 percent.

But buyers have several options for raising the money for a down payment. They can simply put off a purchase and save more or borrow from a family member, financial planners said. They could also tap into the network of nonprofit groups and government-run programs offering help. Some can consider withdrawing money from their retirement accounts.

"Before you get into this, before you even start shopping for a home, go and investigate potential sources of money. Don't dismiss grant programs," said Keith Gumbinger, a vice president at HSH Associates, a real estate research firm. "It is really worthwhile to dig into that stuff. You might not qualify, but it doesn't cost anything" to investigate, he said.

After watching the housing market collapse, Parker took a conservative approach when she decided to buy a home. "Nothing is for free," she said. "If you don't pay anything, it is going to come back and hurt you."

Parker attended home-buying classes at HomeFree-USA, a nonprofit organization, and moved in with her mother, giving up her $1,200-a-month apartment. She set aside her income tax refund and stimulus check and cut back on shopping trips, including for her favorite indulgence, shoes. By the end, she had saved $13,000.

Parker recently found a three-bedroom house in Prince George's County with the open floor plan and updated appliances she wants. She had just enough for the 3 percent down payment on an FHA loan, plus closing costs.

FHA loans are a growing part of the mortgage market, becoming a safe haven for home buyers with little cash. In July, 29.1 percent of all accepted mortgage applications were for government-insured loans, most from the FHA, according to the Mortgage Bankers Association. That was up from 8.4 percent in July 2007, before the mortgage crunch.

But soon even FHA loans will require more of an upfront investment. A housing bill passed by Congress and signed by President Bush requires the agency to raise its down payment requirement to 3.5 percent.

During the housing boom, many borrowers avoided making a down payment by taking out two loans, one that covered 80 percent of the purchase price and the second, a piggyback, to cover some or all of the rest. That strategy could eliminate the need both for the down payment and for mortgage insurance, which lenders require when the buyer puts down less than 20 percent. During the first five months of the year, piggyback loans were part of 9.75 percent of home purchases, compared with 40.8 percent in 2006, according to SMR Research, a New Jersey market research firm.

Without these loans, more home buyers are required to obtain private mortgage insurance. The insurance protects the lender if the homeowner defaults on the loan but does not cover the buyer. Even as these homeowners grow more dependent on mortgage insurance, the industry is demanding 10 percent down payments in large swaths of the country that it has labeled "declining markets."

Freddie Mac, the McLean mortgage financing giant, still offers its Home Possible program, which enables no-money-down mortgages for qualified borrowers including teachers, firefighters and members of the military. Because the loans require mortgage insurance, Freddie Mac acknowledges that they may be more difficult to find. "It is technically available, but given the realities of the marketplace, it may be more difficult to qualify for this type of product," said spokesman Brad German.

The changes are pushing home buyers to consider new options for handling a budget crunch. The National Association of Home Builders has spotlighted the tax credit of up to $7,500 that first-time home buyers are eligible for if they buy a home before July 2009. In an article in its weekly online newsletter, the trade group explained how, by adjusting income tax withholding, a buyer can get the tax credit upfront and use it for a down payment. (The tax credit is a no-interest loan that must be repaid over 15 years.)

The idea has some merit if done carefully, but home buyers should consult with a professional before attempting it, said Annette F. Simon, a financial planner at Garnet Group in Bethesda. There are also some risks, she said.

"People might decide to pursue this strategy and then change their minds about buying a house or be unable to find one by the July 2009 deadline," she said. "At that point, they would have significantly underpaid their 2008 taxes and could incur penalties for doing so."

For home buyers struggling to come up with a sufficient down payment, another alternative is tapping into retirement accounts. A borrower can make a "hardship withdrawal" from a 401(k), which would be subject to a 10 percent penalty. Some 401(k) retirement accounts also allow people to borrow money from the account and pay interest as they repay the loan. A first-time home buyer can also make a one-time, penalty-free withdrawal of up to $10,000 from an individual retirement account, or IRA, although there may be tax consequences, depending on the type of account.

All those alternatives carry risks, Gumbinger said. "I am sure it is going to happen more often with the tightening of the credit situation, but it should be done carefully," he said. "You may want to think about how long it took you to save that money and the compounding effect you're going to lose."

Nonprofit groups and local government-sponsored programs can provide down payment assistance, though some are also feeling the pinch of the housing downturn. For example, Acorn Housing used to be able to help first-time buyers secure mortgages with no down payments or as little as 3 percent down through its relationships with several lenders. The programs were flexible and did not require the buyers to have an exemplary credit score.

Now in hard-hit areas, buyers must come up with 5 percent to 8 percent down, said Lez Trujillo, national field director for Acorn Housing. It is also more difficult for the organization to secure clients loans with below-market interest rates or without private mortgage insurance, she said.

These changes have made home buying nearly impossible in some areas unless the client has near-perfect credit and a sizable down payment, Trujillo said. "To us, it feels like the '80s again, with lenders saying, 'We don't want to lend here' or 'We don't want to lend there,' " she said.

Government-sponsored programs can also provide help. The programs vary by locality -- some offer grants, others loans -- and are often restricted to low- to moderate-income borrowers.

A single person in the District making $33,000 a year could be eligible for a $70,000 deferred loan for a down payment. That drops to $22,850 if the home buyer makes $53,200. The District's employees can also apply for a $1,500 matching grant program. Maryland's Department of Housing and Community Development offers several down payment assistance programs, including one providing a $2,500 grant for qualified applicants.

In Virginia, one program encourages homeowners to save by matching every dollar they put away with $2 from the state, for up to $4,000. "It usually takes a while to save up," said Shea Hollifield, deputy director of housing at the Virginia Department of Housing and Community Development.

With another Virginia program, low- and moderate-income buyers can also receive up to 10 percent of the purchase price of a home to cover the down payment, 20 percent in higher-cost areas. But the program is feeling a budget crunch, and there are some limitations.

Statewide, the amount of money available for the down payment assistance program fell from $3.2 million last year to $2.3 million this year. The Fredericksburg-based Central Virginia Housing Coalition, which has witnessed an increase in demand, is limiting home buyers to a 10 percent grant. "We could run out of money, but we're trying to avoid that," said MaryAnne Bryant, deputy director of the nonprofit group.

The state program cannot cover purchases made in some higher-priced parts of the state, including Arlington and Alexandria, Hollifield said. Homes in Fredericksburg and Stafford counties, for example, are more likely to qualify, she said. "We always have more demand than we have money," Hollifield said.

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For additional information, please contact Shelley Mitchell, smitchell@nehemiahcorp.org, 916-231-1999.

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