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Buyers looking for new sources of money
By Nancy Trejos
The Washington Post
WASHINGTON — Even for people who have money, coming up with a down payment
to buy a house has become more challenging in recent months.
Take Peter McGarvey, who recently found a house big enough for his family
of four. A bidding war ensued over the 2,000-square-foot home, in Takoma
Park, Md. He offered $710,000 and won. Then came the hard part: making
enough of a down payment to get a good rate on a loan and keep the monthly
mortgage payments manageable.
Because he had not yet sold the house he already owned, he had to pull
together a down payment from other sources. "We have lots of equity in the
house, and we have money saved up. Unfortunately, most of it is in
retirement funds and mutual-fund investments," McGarvey said.
Here's how McGarvey and his wife came up with 10 percent to put down, plus
the cash they needed for closing costs: $25,000 was left from the sale of
mutual funds about a year ago, $25,000 came from their parents and another
$50,000 came out of the Thrift Savings Plan, a retirement program for
federal employees that McGarvey's wife has through her job.
Even a few months ago, borrowers did not have to go to such lengths.
That's because it was easy to get a mortgage that required little or no
money down. In fact, four out of 10 first-time buyers used no-money-down
mortgages in 2005 and 2006, according to surveys by the National
Association of Realtors. The median down payment for first-time buyers in
those years was 2 percent of the purchase price, meaning half paid more
and half paid less.
But now that those loans are being blamed for a spike in foreclosures,
many lenders are no longer offering them or have become pickier about who
gets them. The theory goes that borrowers who put a lot of their own money
into properties will be less willing to default and walk away.
"Traditionally, the more someone has invested, the better the payment
record," said Charlie Vance, a manager with Wells Fargo Home Mortgage.
That's not to say that lenders are requiring down payments of 20 percent
or more, which was the norm until the mid-1980s.
There are still some low-down-payment programs. Federal Housing
Administration-guaranteed loans, intended primarily for low- and
moderate-income, first-time homebuyers and others who don't have enough
for a down payment, call for 3 percent down.
If you're a veteran or a member of the military, you can still get 100
percent financing.
But if you don't fall in to any of those categories and you're looking for
a so-called conforming loan, one that's eligible for purchase by Fannie
Mae or Freddie Mac, "you're talking about a minimum of 5 percent down,"
said Guy Cecala, publisher of Inside Mortgage Finance. On a $400,000
house, that's $20,000.
If you need a jumbo mortgage, which is above $417,000 and cannot be bought
by Fannie or Freddie, you'll probably have to come up with 10 percent of
the purchase price in cash, Cecala said. On a $500,000 house, that would
be $50,000. Loans purchased by Fannie and Freddie are considered less
risky to investors and at the moment have better rates than jumbo loans.
The sudden shift in lenders' attitudes means many buyers now must take a
substantial amount of money to the closing table.
The best source for a down payment, lenders and financial planners said,
is the borrower's own funds. "If you've got the cash, that's the best way
to do it," said Heather Evans, vice president and wealth-management
adviser at Merrill Lynch in Tysons Corner, Va.
But if you're like most Americans and haven't saved tons of money over the
years, does that mean you won't be able to buy a home?
Not necessarily, lenders and financial planners say. There are several
options.
Prospective homeowners can take money out of their 401(k) or other
retirement plans if the home will be their primary residence. There are
two ways to do this. The less desirable way, financial planners said, is
to make a "hardship withdrawal," but that is subject to a 10 percent
penalty from the IRS, and the amount withdrawn is taxable as income.
A better — but not risk-free — option, they said, is to borrow the money
from a 401(k) account, which many employers allow for such reasons as
purchasing a principal residence or paying college tuition. Typically,
borrowers have five years to pay the account back, or longer if the loan
is specifically for a home purchase. Borrowers have to pay interest on the
loan. But they are essentially borrowing their own money, and what they
pay will go back into their 401(k) account.
The downside is that the funds withdrawn are not earning returns on
investment, so the borrower will have less money in the account when he or
she retires. Plus, the loan repayments are made with after-tax dollars,
replacing what had been pretax dollars. And if the borrower loses his or
her job or switches to a new employer, he or she must repay the loan much
sooner than expected, usually within 60 days.
Patrick Kennedy, vice president in charge of wealth management services
for TIAA-CREF Asset Management, cautions against taking money from a
retirement plan by either method because of the tax implications and the
loss of wealth. But if someone chooses to do so, he said, the loan should
be repaid as quickly as possible.
"The government has made it easy, and it's very appealing, but you have
got to look at this as a short-term bridge, not a long-term road," he
said. "People have to think through the implications of what they're
doing."
Selling stocks, bonds or mutual funds can also be a good way to raise a
down payment, financial advisers said. But the proceeds could be taxable.
Borrowing against the investment portfolio might be a better alternative,
financial advisers said.
"If you sell things, there will be tax implications," said Evans of
Merrill Lynch. "You want to get specific guidance on that."
Withdrawing from an IRA, or individual retirement account, is also an
option. The IRS does not allow borrowing from an IRA, but a first-time
homebuyer can make a one-time, penalty-free withdrawal of up to $10,000.
The downside: The borrower might owe tax, depending on the type of IRA.
A prospective homeowner might also want to consider borrowing from a
cash-value life insurance policy, advisers and lenders said. There's no
tax on loan proceeds. But they pointed out that most first-time home
buyers don't have much money in their policies.
Another route would be to get a gift from a relative or friend. The lender
will generally ask for a letter from that person saying that the money is
a gift, not a loan that will have to repaid. According to the National
Association of Realtors' 2006 survey of home buyers and sellers, 22
percent of first-time home buyers opted to do this.
Borrowers should also research down-payment-assistance programs. There are
many, some run by government agencies, some by nonprofit organizations,
churches and other community groups. Many employers also offer help.
Jeff Colacurcio and his wife, Lauren, were able to buy a $485,000
four-bedroom house in Falls Church, Va., through a program offered by his
employer, Fannie Mae. He has worked as a financial analyst for the company
for two years. The couple made a 12 percent down payment, of which more
than half came from the Fannie Mae program. The rest came from the
couple's savings.
If it hadn't been for the program, the Colacurcios would still have been
able to afford the house, but they would have drained all their savings.
"We had a cushion that we wouldn't have had left over that allowed us to
keep the savings and do the things to the home that we wanted to do,"
Colacurcio said.
If all else fails, there are other creative ways to come up with down
payments. Pull out that vintage Gucci purse and sell it on eBay. Sell your
bike. Sell your car.
Some advisers and lenders said that if a prospective homeowner has to go
to great lengths to come up with money, maybe it's best to wait until he
or she can save enough money the old-fashioned way. Or maybe buy a
fixer-upper rather than a dream home.
"It doesn't have to be a McMansion," Evans said. "Homeownership should be
within your budget."
Nancy Trejos
Copyright © 2007 The Seattle Times Company
Saturday, November 17, 2007
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