5-percent solutions to help first-time home buyers

High prices and tough lending requirements don't have to stop all young people, even those with only a few thousand dollars, from buying their first home. Though money is important, knowledge of some financing techniques - many of them little used - can be even more valuable. ``There are legitimate, up-front techniques that have been in the standard secondary mortgage market for years,'' says Robert J. Petrelli, senior vice-president at Comfed Mortgage Company in Norwell, Mass. ``We just dust them off a little bit. They might help the guy who says, `Gee, I only have $8,000 and the last banker I talked to said I was going to need $13,000, so I'm not even going to look today.' That's the worst thing, if he stays out when he doesn't have to.''

The techniques Mr. Petrelli explains to buyers, sellers, and real estate agents include seller financing, buydowns, and what he calls ``massaging the numbers'' to raise or lower the interest rate a bit by paying a little less or a little more cash up front.

With house prices well over $100,000 in many parts of the United States, the first hurdle for many young people is the down payment. Coming up with 20 percent, or even 10 percent, plus closing costs, and having enough left over for furniture, repairs, and a cash reserve may be impossible. But that doesn't have to keep them out of the housing market.

The beginning of an answer can be found in what might be called the ``5 percent solution.''

As long as the buyers can scrape together enough of their own money - not counting gifts from parents or anyone else - to make a 5 percent down payment, there may be ways to turn them into homeowners, Petrelli says.

While some lenders might let buyers get away with having less than 5 percent of their own money, exclusive of gifts, as a down payment, Fannie Mae and the mortgage insurance companies won't, Petrelli says.

``They say people are more likely to walk away from a transaction if they don't have any of their own true funds at risk,'' he says.

But while a small gift may not cut it, a big gift, it seems, does. ``Once you get into the 20 percent category, however, then it doesn't matter,'' Petrelli notes. ``The whole 20 percent can come from your family members.''

So while it is possible to get a mortgage with 5 percent down, a buyer must also pay two points (2 percent of the loan balance) at closing, and private mortgage insurance, costing 1 percent the first year. Also, the insurance companies want 5 percent buyers to have cash reserves that equal two or three months' mortgage payments.

But if the down payment can be raised to 10 percent, it's possible to write a loan with zero points and reduce the mortgage insurance to 0.5 percent.

So where does the extra 5 percent come from? Here's where the seller might help, especially a seller who's been waiting several months for just the ``right'' buyer.

Seller financing had its heyday in the late 1970s and early '80s, when interest rates were so high sellers had to lend buyers part of the money needed to buy the house. The phrase ``taking back a second'' was often heard.

This simply means the seller gives the buyer a small loan in addition to the large mortgage the buyer is getting from the bank or mortgage company. In a small way, Petrelli says, this idea is coming back.

``We have a market where sellers are more willing to consider taking back a very small second sometimes,'' he says. ``You don't need a big one. You don't need a 20-percent-down second. Sometimes a matter of a couple of thousand dollars might be enough. Or sellers might pay a little bit of the closing costs.''

So by lending a few thousand dollars to the buyer or paying some closing costs out of the profits, a seller who's had a house sitting on the market for several months could have a buyer.

``A lot of sellers have been out there for many months waiting for that qualified buyer and have turned away some good deals because they were holding out for the `right' price and buyer,'' Petrelli says. Whether a seller helps a buyer a little, or at all, depends on how much money the seller needs to buy his or her new house, or if they're buying a new house at all, Petrelli says.

``All this depends on the seller's circumstances,'' he says. ``The seller who's buying another piece of property may need all the the cash to get into the other property. But every circumstance is different.

``You might have a seller who owns a house in Florida and is retiring, or he's leaving the state. Or maybe they just want to divest themselves of the income property, condo or whatever. These situations do exist, where people do have some flexibility.''

The search for flexibility has become more important lately, Petrelli says, as loan requirements have become tougher, particularly on adjustable-rate mortgages (ARMs). At Comfed, the current rate on a one-year ARM is 7 percent. But the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (known respectively as Fannie Mae and Freddie Mac) both now require buyers to be qualified, or able to support monthly payments, at a rate 2 percentage points higher.

``So we have to qualify them at 9 percent,'' Petrelli says.

But there are at least partial solutions for this, too. One technique, known as a ``buydown,'' takes the rate on a 30-year fixed mortgage, currently 9 percent, and with a some extra cash up front, reduces it to an 8 percent loan. The extra cash would equal one ``point.''

Or, Petrelli says, a lender that would normally charge 9 percent and two points on a conventional mortgage might raise the interest rate to 9.95 percent, with only one point, but use the point that was saved to ``buy'' the rate down to 8.85 percent. ``They wind up with a rate they can now qualify at, and you take a weak loan and make it into a stronger loan.''

Finding these solutions and finding out if they will work for you will take time and a good lender. Ask some real estate brokers what banks, savings-and-loans, and mortgage companies they work with and which ones are most knowledgeable about various financing techniques.

``It's a good feeling,'' Petrelli says, ``when you take someone who's been badgered about and they've been told, `No, you can't to this and no, you can't do that,' and by working with them, give them little more knowledge and help them buy that house, that piece of property.''