When Mary Hollis stuffs her fliers into windshields or tacks them up on bulletin boards, she knows that if people spot the words “low down payment” she may have cinched their interest in coming to one of the free home buying workshops sponsored by her employer, ACORN Housing Corp. of Illinois.
“If people see those words, and then turn it (the flier) over and read that they can buy a home for just $1,000 down payment, they say, `Oh really?”‘ explains Hollis, an outreach coordinator and counselor at ACORN, a non-profit organization that promotes homeownership.
With people like Hollis spreading the word, low-down-payment mortgage programs are no longer housing’s best-kept secret. The fact is, many first-time buyers no longer have to save for years to scrape together a down payment.
Mortgages requiring as little as 3 percent down — or even nothing down–abound. Traditionally, it was necessary to make a down payment of at least 20 percent of the purchase price of a home.
Since the mid-1990s, mortgage lenders, nudged by the government and community groups, have lowered the bar that blocked many people from becoming homeowners. Today’s low-down-payment loans are one of the biggest reasons 67 percent of American households — a record number — now own their homes.
Particularly significant is the way the loans have boosted homeownership rates among minorities and low-income households as well as among young adults, experts point out.
Those trends should have positive benefits for the country, as more immigrant, single-mother and other nontraditional household types move up the housing ladder.
“Owning a home represents one of the most effective ways to create personal wealth,” says Stephen Brobeck, executive director of the Consumer Federation of America, an advocacy group in Washington, D.C.
In general, it takes a decent credit record to secure one of the low- or no-down-payment mortgages.
As long as the economy hums along, and people’s credit ratings remain stable, homeownership rates should continue to climb, predicts Keith Gumbinger, a spokesperson for HSH Associates, a Butler, N.J., mortgage data publisher.
But if the economy goes sour, not only will homeownership gains halt, but experts worry that some borrowers who have made just a small investment in their home may default on their mortgage.
Although most people tend to pay their mortgage ahead of other bills, homeowners could walk away if they lose their jobs or the value of their home dips significantly below what they paid for it.
“I have heard people use the expression `we are engaged in a fairly large social experiment,’ ” said Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard University.
It may be a large experiment, but it’s also been a relatively quiet one. Many people who could benefit from these mortgages still don’t know about them, Hollis contends. Hence, the need for the fliers.
Low down payments have long been a hallmark of government-sponsored mortgages, such as those backed by the Veterans Administration (VA) or the Federal Housing Administration (FHA).
Most mortgages, however, are known as “conventional” loans — the funds are advanced to the borrower from a mortgage company, bank or savings and loan, and the government plays no role in insuring or arranging the loans.
Ten years ago, just 8 percent of all conventional loans were made with the borrower putting down 10 percent or less of the price of the home being purchased.
“Now about 25 percent of all conventional loans have less than 10 percent down payments,” said Brian Carey, an economist with the Mortgage Bankers Association, Washington, D.C.
One of the most significant developments of the 1990s that brought about that change, notes Michael Shea, executive director of ACORN, was that the two major agencies that buy mortgages from lenders started to take a hard look at how to loosen down-payment requirements and other underwriting standards, such as what constitutes a good credit risk.
Known as Freddie Mac and Fannie Mae, these agencies are private companies that were chartered by Congress to create a secondary market for home mortgage loans and thus insure a steady supply of mortgage money for lenders.
As part of their government-sponsored enterprise status, they are mandated to promote more lending among low-income and minority groups.
Fannie Mae’s “Community Home Buyer” program, for instance, has been effective in helping many lower-income families say goodbye to their landlords.
Under the program, even borrowers whose credit histories are a little flawed may still be approved for loans, provided they put 5 percent down and undergo credit counseling.
Those with more polished credit histories can put just 3 percent down, and receive the other 2 percent in the form of a gift or loan from a family member, friend, or nonprofit agency.
Once Fannie Mae and Freddie Mac took the lead in abolishing long-held axioms about who’s eligible to receive a mortgage, other lenders soon rolled out their own low- and no-down-payment products.
Many of these loans aren’t intended for low- or moderate-income borrowers at all, but rather are aimed at anyone who is ready to buy, doesn’t want to part with any up-front cash, and is a good credit risk.
“We have one program specifically for doctors where we will give them 100 percent financing,” notes Ken Perlmutter, president of Perl Mortgage, a Chicago mortgage brokerage.
Lenders aren’t just cutting down payments, they’re also trimming the other up-front costs for closing expenses and private mortgage insurance (PMI), notes Gumbinger.
“You’ll pay a little bit more in interest rate on your mortgage, but a lender will bundle in closing costs, which often amount to several hundred dollars,” he said.
Any time a borrower makes less than a 20 percent down payment, he also must pay for PMI. Until a few years ago, Gumbinger says, borrowers were expected to pony up a year’s worth of premiums up front.
Now, the amount can be tacked on to the monthly mortgage bill. Someone borrowing $100,000 for example, might pay an extra $25 each month, Gumbinger notes.
While gains in the homeownership rate are touted by politicians and the realty industry alike, allowing people to sign up for a hefty mortgage bill which will arrive every month for the next 30 years has a downside: the possibility that the homeowner won’t handle payments if a layoff or other crisis rocks his personal financial picture.
“We are not doing anyone any favors if we encourage people to purchase homes that they can’t afford or manage,” says Brobeck of the Consumer Federation of America.
So far, Carey notes, “we haven’t seen any evidence that low-down-payment loans have spiked (up) delinquencies.”
The most dangerous scenario, notes Harvard’s Belsky, is if a recession not only sparks joblessness, but also causes home values to drop.
“There has been an increase in low down payments during a period when housing prices are rising, so you can only speculate on what would happen if housing prices declined,” he said.
Fortunately, lenders now have better systems in place to allow financially strapped homeowners to stay in their home without walking away, notes Brigid Haragan, director of home buyer education for Fannie Mae.
“We are working with loan servicers to make sure they will have many flexible options for borrowers. Perhaps, for instance, they could re-do the (mortgage) note for a period of time, allowing interest-only payments,” Haragan said.
Belsky adds that although homeowners would naturally become discouraged if the value of their house dips below the amount owed on a mortgage, it’s human nature to want to stick out any price declines, if at all possible.
Experts say that perhaps the most important element ensuring lower-income borrowers who take on a heavy mortgage load won’t miss payments is that counseling is required before approval is granted for many of the loans.
“There is a clear relationship between low down payments and default. But let me add that those who are adequately prepared to accept the responsibilities of a mortgage do just fine,” Brobeck said.
Counseling, which underscores the importance of building a savings fund for unexpected maintenance expenses and hardships, does indeed help lower-income buyers adjust to the financial realities of homeownership, agrees Shea.
“But a lot of what passes for counseling we don’t consider counseling,” Shea said.
Haragan of Fannie Mae agrees that just handing borrowers a booklet or having them sit through a quick lecture isn’t effective in helping some marginal buyers build effective financial skills.
That’s why a nonprofit organization called the American Homeowner Education and Counseling Institute was formed to develop a core curriculum and standards for counseling, she notes.
Soon, Haragan hopes standardization will enhance more borrowers’ capabilities.
Counseling is only required on special loan programs, like Fannie Mae’s Community Home Buyer mortgages. Many of the conventional low-down-payment loans are open to anyone with stellar credit and a rosy earnings potential.
Low-down-payment loans were originally developed with the aim of boosting minority and low-income home ownership, but they’ve also been responsible for soaring ownership rates among young, upwardly mobile whites.
“The rising tide lifts all ships,” notes Shea.
In fact, U.S. Census Bureau statistics show that ownership rates among households under age 35 dropped between 1982 and 1993, but since then have made a strong comeback.
In 1998, 39.3 percent of under age 35 households were owners, compared to 37.3 percent in 1993.
Also, gains have been strong among low-income groups. More than 50 percent of households with incomes below their area median are now owners, said Belsky.
Still, low down payments can’t help turn renters into owners if there are no houses to be found within a reasonable price range, asserts Gail Schechter, executive director of the Interfaith Housing Center of the Northern Suburbs, based in Winnetka.
That’s why many who work in affluent suburban areas can’t buy a house within a close commute to work, she says.
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AFFORDABLE LOANS CAN BE JUST A CLICK OR CALL AWAY
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Thinking of buying a home but don’t want to part with a lot of up-front cash? Most mortgage lenders will be happy to discuss whether or not you qualify for a low- or no-down-payment loan.
In addition, there are many special low-down-payment loan programs geared to lower-income households or borrowers meeting certain eligibility requirements.
Here are some places to contact if you think you might be eligible for one of the special loans:
– The Illinois Housing Development Authority does not offer mortgages directly, but works through local organizations throughout the state to provide loans to eligible borrowers. For information, visit IHDA’s web site at www.ihda.org or call 1-800-942-8439.
– Fannie Mae maintains a consumer information line at 1-800-7FANNIE. The “Community Home Buyer’s” mortgages are available to borrowers whose household income is no more than 100 percent of the median household income in the area where they plan to purchase a home.
– Freddie Mac suggests contacting a local lender about “Affordable Gold” mortgages. Consumers can also visit Freddie Mac’s web site at www.freddiemac.com.
– The City of Chicago’s City Mortgage Program provides loans at below market rates and grants of up to 4 percent of the loan to help buyers meet closing costs and down payments. Call 312-742-HOME for more information and a list of participating lenders.
