Real Estate

Many first-time buyers need help from sellers

By william kugel

As we get closer and closer to spring, more and more first-time buyers are likely to emerge with a desire to own rather than rent a home. While we are still enjoying a relatively low level of unemployment, a decent if not robust economy, and very desirable interest rates, expectations for hot spring real estate market should be high. Now add in the factor of a decade of increased availability of loan programs specifically tailored to help renters become first-time home buyers. All of these factors have contributed to a ground swell of new home customers who boldly seek to purchase a new home even though their cash resources may be non-existent. One of the effects we are seeing is a buyer with a little more courage to "go for it". With psychological cautions having a little less of a hold on some buyers, much of the business now going on in the real estate market involves buyers who are willing to make more of a stretch into home ownership. First-time buyer programs are designed to over come the traditional obstacles that prevent younger couples, disadvantaged individuals, minority groups, and other low- to moderate-income groups from becoming homeowners. These obstacles include the lack of credit history, lack of income, lack of home ownership education, and lack of savings for a down payment. The mortgage industry moved earlier in the 1990s to increase the availability of low down payment loans. At first, it relaxed some of the tight restrictions associated with 95 percent (5 percent down) loan programs. In recent years the guidelines associated with gifting monies has relaxed, permitting some 95 percent loans to be comprised of as little as 3 percent down from the buyer. Now, Fannie Mae, the nation's largest source of home mortgage funds, not only has a Flex 97 (3 percent down) mortgage, they even have a Flex 100. You may have guessed that this is a 0 percent down program. But if you think the possibilities end there, you're wrong. "Homestretch" (and other programs such as NH Housing) even provides for additional monies to cover closing costs.The FHA loan still remains one of the easiest programs to qualify for with the lowest down payment (excepting of course the 100 percent financing offered to veterans). The FHA loan requires only about a 2 percent down payment. Yet, there are still many qualified first time buyers that still lack just one thing: enough money to close. The FHA loan has another aspect that is especially helpful to first time buyers: it allows sellers to pay all or part of the buyer's closing costs and/or prepaid expenses needed at closing. This truly can turn the tide for many would be homeowners. While many programs make qualifying easier, the most formidable obstacle to home ownership for most would be home owners is still amassing the money needed for a down payment, closing costs, and the prepaid funds needed at the time of closing. And please keep in mind that a little money needed for closing can look like a lot to someone who has always rented and has not been able to accumulate any savings. OK. So you are well employed; you have excellent credit; and you even have some savings. But, at first blush it looks like you are going to be a little short of having enough cash to close on a house you'd like to own. You've decided to sell some stock, tap your IRA or 401k plan, or sell off your snowmobiles, and you are almost there. What to do?Here are a couple of more ideas to clinch the deal. Structure your offer to purchase in a way that the seller pays some or all of your closing costs. Ideally (for the buyer), you may get the seller to pay your closing costs at the price you want to pay for the home. Most sellers expect offers below their asking price. But, alternatively, your offer could be closer to their asking price, or even a little more, so you can have the cash to work with in closing the deal. I recommend a two-stage offering process. In your original offer find out where the seller will settle. Then ask your real estate agent to replace that agreement with one at a higher sales price but passing the difference to you by paying a portion of your closing costs. There are a few things to be careful about. Some loan programs restrict the seller's contribution to a limit of 3 percent and some also test that some minimum percentage come from the buyer's own funds. Next, don't offer more than the home is worth. Remember, lenders will be especially watchful of the appraisal on a home where the loan-to-value is 95 percent or higher. This strategy will fail if the appraisal does not confirm the market value is at least as much as your offer. Another detail to know is that the wording of your offer is critical to your success. The purchase contract usually needs to state that the seller agrees to pay your "non-recurring closing costs" up to a certain amount. (If you do not word the offer this way, the lender will interpret it as a discount on the sales price and figure their loan as a percentage of this lower value.)One final word: When you stretch yourself into a purchase, put a lot more time into planning and research. Go over your figures constantly, before and after your make your offer. And lean on mortgage professionals to help you gather the information you need to know if your transaction will succeed. William Kugel is author of the column MORTGAGE$ in publication for 11 years, a senior loan officer with GMAC Mortgage Corp., and a Mount Washington Valley resident. You may write him c/o of The Conway Daily Sun, visit the web site or send e-mail to This email address is being protected from spambots. You need JavaScript enabled to view it. Rights Reserved. Copyright 2002, W.H. Kugel.
  • Written by Tim Dunham
  • Category: Real Estate