Credit is still tight, but here are six ways to uncover a great mortgage and otherwise make a purchase possible.
By now, everyone has heard there are some great real estate deals out there. Foreclosures and short sales, sad as they are for the people who endure them, mean opportunities for buyers -- not only in themselves, but also because they drive down the prices of neighboring market-rate homes. And with the government extending its first-time home buyer tax credit of up to $8,000 to contracts signed by April 30 and offering a credit of up to $6,500 to some repeat buyers, who also must commit by April 30, who can resist jumping in?
Lots of people, it turns out. Many, seeing news reports about tightened credit, think they won’t qualify for a mortgage and so refuse to get their toes wet. “There is a perception out there that it is impossible to get a loan,” says John Battaglia, president of Cambridge Mortgage Group in Hingham. “People are gun-shy because they don’t think they can qualify, or they have to have 20 percent down, or they have to have tremendous credit.”
That’s not necessarily true, according to Battaglia and other mortgage specialists. First-time buyers especially -- and that includes anyone who hasn’t owned a home in three years -- will find plenty of options even with little down and a FICO credit score as low as 640 (out of 850). Even if you already own a home, there are possibilities that will allow you to trade up. Of course, no one would encourage the reckless borrowing of the past decade. But if you shop responsibly and buy within your means, now can be the ideal time to make a move.
1. Snag a loan with a Low Down Payment Jumbo loans -- for amounts more than $523,750 for the purchase of a single-family (in some local counties the amount is lower) -- do require a sizable down payment. But mortgages for lower amounts -- so-called conventional loans -- can be had for 10, 5, or even 3 percent down, as long as you have a good credit score.
Only a few private lenders still provide loans for less than 20 percent down, yet most such loans are backed by the Federal Housing Administration. “FHA guidelines are still pretty liberal,” says Dutch Maranhas, a loan officer with Prospect Mortgage in Dartmouth. “You need to document more than a few years ago, but that’s for the protection of the consumer. A minimum FICO score of 620 and 3.5 percent down for an owner-occupied purchase can get you an FHA loan.”
One caveat: “If you put less than 20 percent down,” says Battaglia, “most of the time you’ll need mortgage insurance.” Depending on the loan amount, the PMI, or personal mortgage insurance, can cost $75 to $200 a month for as long as it takes you to get 20 percent equity in the property. “Probably nine or 10 years,” Battaglia concedes. “But after two years, if your house has gone up in value, you can request an appraisal to see if they’ll waive the PMI.” The insurance is harder to get now than it was a few years ago. Insurance companies feel they’re taking a bigger risk and have tighter restrictions -- particularly for condos, where the association must show robust financial health for an individual to get a mortgage.
Veterans, surviving spouses, and active-duty service members can get a Veterans Affairs-guaranteed loan from private lenders for a shocking zero percent down, as long as they have good credit.
A loan program called MassAdvantage (massresources.org), run by the state agency MassHousing, offers 30- and 40-year fixed loans requiring 3 percent down. The program does adhere to income caps, but they’re far from poverty level. In Boston, for instance, a one- or two-person household can bring in as much as $99,200 to qualify, and the maximum purchase price can range from $488,413 for a single-family to $754,624 for a four-unit building.
MassAdvantage is just one example of the possibilities out there. “The first thing I’d recommend to anybody is if you know what town you want to move to, contact the town and see if it offers any programs like this,” says Joe McBreen, a loan officer with Mortgage Master in Belmont. “There are also many programs at the state and federal level, so for a buyer who’s willing to put in a little work, there are some great deals out there.” One good place to start is at HUD.gov or, if you’re looking in Boston, at the city’s Boston Home Center (bostonhomecenter.com). Most such programs require that you attend a class for first-time home buyers and, for multifamilies, another for new landlords.
2. Ask for a Gift or Grant If your parents have cash to spare, now’s the time to inquire if they’ll give you some for a home purchase. For loans with low down payments, “you need 5 percent of your own funds when you get a gift,” says Dianne Pfluger, underwriting manager at Hingham’s Cambridge Mortgage Group. “So if you were buying a home with 85 percent loan-to-value, you have 5 percent of your own funds, and Mom and Dad can give you 10 percent.” If you’re putting 20 percent down, on the other hand, the whole amount can be a gift.
This kind of gift can be a good deal for your parents, too. Each of them can give you up to $13,000 a year and neither you nor they have to pay a gift tax on it; beyond that, your parents will be taxed as the government seeks to minimize attempts to escape estate taxes.
As McBreen points out, many cities and towns offer grants to first-time home buyers in the form of help with down payments, renovations, or closing costs. Boston’s Cash-to-Close program (cityofboston.gov), for example, can give residents with a household income of up to 120 percent of the median -- that is, as much as $108,250 for a family of four -- reduced closing costs and a $300 lender credit. Many such programs do have restrictions. Cash-to-Close, for one, requires that you stay in the house for a minimum of 10 years. “After that, the assistance is forgiven,” says Martha Garcia, a loan officer at Boston Private Bank in the financial district.
3. Choose Lease-to-Own If you have good earnings and credit but it’s difficult for you to save for the down payment, closing costs, and other expenses, lease-to-own might work for you. You live in the property being offered by a seller and pay rent to him, and each month he credits a portion of it toward the down payment. Say you want to buy a two-bedroom condo with a market rent of $1,200. You might agree to pay $1,500 a month instead; the seller puts the extra $300 a month into an escrow account that will make up your down payment when it’s time to apply for a mortgage.
It can work, but there’s risk involved for both parties, because the price agreed on at the beginning of the lease may not reflect the market value by the time you’re ready to buy. If the market value goes up, the buyer benefits, but if it goes down, the seller does.
Also, because these agreements tend to favor sellers, make sure yours specifies fair terms by contacting a real estate attorney before signing. “Whenever you’re going into unconventional territory,” says Maranhas, “make sure you have counsel with experience handling those transactions.”
4. Select a Foreclosed Property Many people have been scared off of bank-owned properties by tales of long waits and complicated procedures. But Fannie Mae, for example, has developed a new program to facilitate the sales of foreclosed properties that it owns. Called HomePath
(homepath.com), it allows for 3 percent down on a single-family with no appraisal and no private mortgage insurance. Your down payment can come from a gift, a grant, or a loan from a nonprofit organization, state or local government, or an employer, and often money to renovate is built into the loan.
The Boston Home Center is one of the government agencies that provides financial assistance for those seeking to buy a foreclosed property. Eligible buyers -- again, that’s anyone with a household income of 120 percent of the median or less -- can apply for $15,000 to reduce their mortgage principal and an additional $50,000 to help with repair costs. As with the city’s Cash-to-Close program, any such grant under $40,000 is forgivable after 10 years. “If you sell the home or move out before five years,” says Bill Cotter, deputy director of the Boston Home Center, “we will forgive 20 percent of the loan and expect the rest. After six years, we start prorating it.”
As with lease-to-own, buying a foreclosed home requires a good real estate attorney who’s experienced in handling such agreements. “If you have your ducks in a row,” Maranhas says, “have all your documentation and get preapproved by a direct lender, the deal can be done quickly and smoothly, allowing you to capitalize on the economic opportunities in buying [a foreclosed] property.”
5. Go for a Multifamily “A lot of people think they need to do a condo and end up paying more money,” says Zaragoza Guerra, a counselor at the nonprofit Neighborhood of Affordable Housing in East Boston. “But a multi in good condition can be a great investment.”
According to Cambridge Mortgage Group’s Pfluger, you can get “more house,” because 75 percent of the rental income is considered when your loan-to-income ratio is calculated. So, say you make $100,000 a year and want to buy a $450,000 triple-decker. You plan to live in one unit and rent out the other two for $1,500 a month each. When the loan is calculated, your income jumps to $127,000 annually, with the extra $27,000 coming from a portion of your rents.
Now say you have a 30-year mortgage on the house. Even if you never raise the rents, at $1,500 a month for each of the two units, by the end of your loan the tenants will have put more than $1 million into your pocket. Sure, you will have to deal with tenant issues on occasion -- finding new ones, handling the odd problem. You’ll also have expenses with the rental units, but you get tax write-offs for capital improvements to them that you don’t get with a single-family home or a condo.
“Whether you want to be a landlord or not is a personal thing,” says Guerra, “but it does make a lot of economic sense.”
6. Get a Nonprofit’s Help Finally, two local nonprofits offer unique programs worth looking into.
The alluringly named SoftSecond loan, offered by the Massachusetts Housing Partnership (mhp.net), is actually two loans: a conventional one for 77 percent of your purchase price and a second, discounted one for 20 percent. To qualify you need to be low- to moderate-income, put 3 percent down, and have a minimum FICO score of 660. This loan doesn’t require private mortgage insurance. If you need help making payments on the second loan, public subsidies are available.
Another option comes from the Neighborhood Assistance Corporation of America (naca.com), headquartered in Jamaica Plain. It offers some refinancing help, restructures subprime loans on reasonable terms, and provides new loans with no income limits, just price and geographic limits (see the website to learn if your town is eligible). The rate is excellent -- 4.75 percent as of this writing -- but there are a few catches. First, you have to take a workshop and become a member of the nonprofit, paying a small upfront fee and $50 monthly for five or 10 years, depending on the amount of the loan. Second, no member of the household can have an ownership interest in any other property, and you must stay in the house for as long as you receive your mortgage through the nonprofit. Finally, you have to participate in at least five “actions and activities” annually, such as volunteering in the nonprofit’s office and joining advocacy campaigns.
Both avenues prove that homeownership, even during what’s considered a “credit crunch,” is achievable.
Elizabeth Gehrman Boston Globe February 21, 2010