|Fall Real Estate 2005
Publication Date: Wednesday, October 12, 2005
Downsizing down payments
by Suman Mudamula
With Palo Alto's median prices hovering around $1.3 million, a typical 20-percent down payment could buy the whole house in another community. Do all these potential home buyers have $260,000 stashed away in savings accounts? Not necessarily.
Whereas the age-old method of saving still is the best bet to put down a sizable down payment in order to lock in affordable lower interest rates there are many other options for those desperate to own a house.
"Coming up with down payments is critical, especially in this area of the state," said Kristen Amery-Sphar, a senior loan officer at Princeton Capital in Palo Alto. Even with a little down payment one can turn the dream of owning a home into a reality by taking advantage of First Time Home Buyer (FTHB) programs, or borrowing from 401(k)s, or with gift money and equity-sharing offered by families and friends.
While private lending -- borrowing money from parents, siblings and friends -- is popular among first-time home buyers, Amery-Sphar suggests people should see if they qualify for FTHB programs offered by the revamped California Housing Finance Agency (CalHFA), which allows first-time homebuyers to get 100 percent financing with below-market, fixed rates and deferred payments.
Caroline Wolf, a senior loan consultant with Princeton Capital, Palo Alto, is a big fan of the CalHFA homebuyer program. "I believe that the program offered by the CalHFA is a great opportunity for people to own a home as I personally benefited from this."
The program -- available to anybody whose household income (three or more people) is below $140,493, or below $122,168 (one to two people) -- offers subsidized interest rates that do not change for the entire 35-year term and interest-only payments for the first five years.
Another way to reduce the down payment is to cut back on the closing costs. By taking advantage of credit for non-recurring closing costs offered by some sellers, the buyer can significantly reduce the amount of cash needed to own a home, Wolf said. If for example, the purchase price of a house is $500,000, the buyer offers to pay $510,000. The seller then credits the buyer with $10,000 amount payable toward the closing costs.
According to Wolf, it is a win-win situation for both the seller and the buyer as the seller sells the house for a little over the listed price and the buyer gets the keys to his new house. There is one down side: The new owner must pay higher taxes, based on the higher purchase price. Wolf suggests consulting with tax advisors for information on tax benefits and write-offs.
"When it comes to down payments we see how far we can stretch them to 100 percent financing. It is so difficult to afford a house here in Palo Alto," said Greg Walker, a mortgage broker at Adamarc in Menlo Park.
Some families provide down payments with equity-sharing, he said, adding that others share the loan with their children, while letting the occupant make payments.
"Up to 5-10 percent of my clients resort to private lending to come up with down payments," he said, citing high local home prices. "A couple I worked with bought their first home only when a group of friends came forward to help them out," Walker added.
But first-time home buying is not for people who are unwilling to make small sacrifices, noted John Simons, a mortgage broker with Emerson Financial in San Mateo. It is only for those ready to make adjustments in their lifestyle as it needs a lot of discipline in handling money, he said.
Even after the decision has been made, "a lot of it is determined by what the situation of the buyer is. The transaction depends a lot on if they are first-time home buyers, or transferred from another place," he said.
For first-time buyers who need to come up with 5 to 10 percent of the home price for a down payment, he suggests drawing from savings, stock liquidation or borrowing from a 401(k), because they can pay themselves back. Contrary to some loan officers who advise against borrowing from retirement funds such as 401(k)s, as it is not tax-deductible, Simons said that "Lately, for some reason, probably because of the huge sale price of houses, we are seeing less and less of gift money." Then the shoppers have nowhere to go other than their 401(k)s, he added.
While fewer people are going for the option of zero down payment, "it is definitely more than what I used to see. Even though it costs the buyer more in the long run, he does become the owner of the house," Simons said. He pointed out that younger people moving to California just want to get in the market here, and are ready to do whatever it takes.
Another way to enter the market is through equity-sharing. "By finding equity-sharing partners you can afford to buy a house even if you do not have money for a down payment. Saving money for a down payment in this economy of escalating prices is difficult," said Carla Rayacich, president of Stanford Mortgage in Palo Alto.
According to Rayacich, there are many people willing to come forward with a down payment, in exchange for equity sharing. She recalled that doing equity-sharing on two different houses with two of her ex-boyfriends helped her to pay off her college loans.
"Appreciation in home value makes this possible," she said. She pointed out that one of her clients bought a condo after much coaxing. Her dad lent her $42,000 that he was putting aside since she graduated from college. She could pay off her dad just by living in the condo for two years. "She earned 16 percent profit on equity," she said.
People who meet at least two of the three important parameters -- clean credit scores, good income and some assets -- can plunge into the market, noted Rayacich. She also underlined the need to explore family resources. Teaching women to step up and ask their families for help is one of the things that she highlights in her Home Buying for Women classes at various local colleges.
"With appreciating home values you can definitely pay your family back," she said.
Editorial intern Suman Mudamula can be reached at email@example.com.