NorthJersey.com

Down Payments For Home Buyers Fall Within Reach

The Record (NorthJersey.com) — February 21, 2016

By KATHLEEN LYNN
Staff Writer
The Record

Barbara Bolig and Chuck Claussen of Bergenfield were tired of paying rent, but had to delay buying a house while they saved for a down payment.

"We didn't think we'd be able to afford it," said Bolig, an administrative assistant. "We thought that we would have to wait until we got 20 percent. In this area, that's a pretty big nut."

But while 20 percent was the traditional down payment paid by generations of homebuyers, the Bergenfield couple and many other buyers have found that it's possible to buy a home with down payments as low as 3 percent. The average down payment for first-time buyers is now 6 percent, according to the National Association of Realtors.

Even with the availability of such mortgages, however, the down payment is a significant issue for home buyers — and the housing market as a whole. Month to month, the costs of homeownership are often no higher than rent, especially in a high-rent area like North Jersey. But a lot of young households — struggling with student debt, flat incomes and high rents — find the down payment a major hurdle to buying a home.

"Many first-time home buyers have solid employment and good incomes, but haven't had the years or ability to put money aside for a down payment," said Terri Golden, a real estate agent with Coldwell Banker in Fort Lee.

Although the mortgage interest rate is more closely followed, the down payment is a more important deciding factor for homebuyers.

"A small movement in the interest rate, you can generally overcome because its effect on the monthly payment is slight," said Keith Gumbinger, vice president at HSH.com, a Riverdale company that tracks the mortgage market. "But accumulating sufficient funds for the down payment is definitely considered to be the biggest stumbling block, especially for first-time buyers."

To get around that challenge, first-timers use a number of strategies. Of course, a large number choose loans that require only 3 percent or 5 percent down, though those mortgages also come with annual premiums to pay for mortgage insurance. Some are able to accumulate 10 percent or 20 percent down payments, often with the help of family gifts, wedding gifts or bonuses and commissions at work.

And a majority cut expenses to build their savings.

"That pizza night has become a ramen noodle night," joked Craig Hadley, 37, a travel industry executive who is renting in South Hackensack with his wife and two children, but saving up to buy a house.

The difficulty of amassing a down payment is believed to be one of the big reasons that first-time buyers made up only about 32 percent of the home-buying market last year — the lowest point in almost three decades, and well below the typical level of about 40 percent, according to the National Association of Realtors.

Student debt is a major burden, carried by about four in 10 first-time buyers, according to the National Association of Realtors. Scott Forman, branch manager of the NJ Lenders Corp. office in Montvale, says that in his experience, student debt "has been absolutely the number one thing" holding back potential homebuyers. He often sees borrowers with monthly student debt payments of $500 to $600 a month — even as high as $1,200.

For many buyers, the only path into homeownership is with a low-down-payment mortgage. Low-down-payment loans have long been backed by the Federal Housing Administration, which offers mortgages with down payments as low as 3.5 percent. "FHA loans are still very important for first-time buyers," Gumbinger said.

Last year, mortgage finance giants Freddie Mac and Fannie Mae added loans requiring down payments of only 3 percent. In addition, there are programs that offer low-down-payment loans, and sometimes assistance with down payments, to low- and moderate-income first-time homebuyers. New Jersey Citizen Action, Bergen County's American Dream program and New Jersey's Housing and Mortgage Finance agency all have such programs, as do some North Jersey banks. For example, Wayne-based Valley National Bank offers a "Community Homeownership" mortgage aimed at lower-income buyers that requires a 3 percent down payment, which can include gifts or grants, and has a discounted interest rate and bank fees of only $100. The household income limit is $56,969 in Bergen and Passaic counties.

The idea of mortgages where the borrowers put little of their own money on the table might bring up bad memories of the housing boom's excesses, when unqualified borrowers were able to get mortgages. But lenders say loans today are being carefully underwritten, with full documentation of the borrowers' finances. And Freddie Mac said its 3-percent-down loans are performing about as well as 20-percent-down loans.

Bolig and Claussen are among the buyers who chose a low-down-payment option. After a friend who worked in the mortgage business told them it wasn't necessary to put down 20 percent, they put down 5 percent on their Bergenfield split-level. They paid $325,000 for the home, which includes a deck, a pool and lots of space for entertaining.

"We were tired of putting our money into rent," Bolig said. Buying a house, she added, "is an investment, and it's something that comes back to you. Paying rent doesn't help you, it just helps the landlord."

She said if they had waited until they amassed a 20 percent down payment, they would have had to delay buying for another year. But fearing that higher mortgage rates are on the horizon, they didn't want to wait.

Along with the low down payment, Bolig and Claussen were able to roll about $7,000 in closing costs into the mortgage amount. This is done, with the seller's agreement, by raising the contract sale price, but having the seller return the closing costs to the buyer.

One drawback of lower-down-payment loans is that they carry annual insurance premiums, to protect the lending industry against losses on those loans. The annual premium for insurance on an FHA mortgage is 0.85 percent annually on the loan balance, an amount that was cut a year ago from 1.35 percent. Fannie Mae and Freddie Mac have annual mortgage insurance premiums ranging from 0.80 percent to 1.35 percent of the loan amount, depending on the product and the borrower's credit score. The insurance can be dropped once the homeowner has at least 20 percent equity — that is, once the mortgage amount is no more than 80 percent of the home's value.

Nick Rakov, 30, and his wife, Jen, 31, took out an FHA loan and put down 6 percent when they bought a condo in Hoboken two years ago. They decided to buy after realizing they could own a place for not much more than the $3,000 monthly rent they were paying for an apartment on the Upper West Side.

To get rid of the insurance fees on their mortgage, they're paying extra each month trying to build up equity in the property, said Nick Rakov, who grew up in Mahwah and works for an architectural engineering firm. He and his wife are happy they made the leap to homeownership.

"It's definitely worth it if you're planning on staying in a location for five to seven years," he said.

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