Military personnel of the 20-something generation who aspire to owning a home face the challenge of saving for a down payment and qualifying for a mortgage. I recently received a letter from a 28-year-old who posed questions that other consumers in their 20s have asked:
-- What steps should I take to ensure that in five years I can be in a position to buy a house? I can save an average of $100 a month.
-- Is getting a loan through a government agency that bad a deal? I've heard that they can limit where you live, and getting loans to remodel can be difficult. -- What should I do with my $100 a month savings? Should I just throw it into a savings account or open up some type of CD? What is impressive about these letters is how realistic they are. It's difficult to save $100 a month. But even with a savings account, saving $100 a month for five years would give you a down payment of $6,000, not including interest accrued. Depending on the loan program, income and credit history, the $6,000 could be all or part of the down payment for a lower-end, single-family home or a mid-level townhouse or condominium (both priced at about $150,000). Financial planners have offered another option for making your savings grow: You could open a savings account or money-market account where there is very little risk toward the principal, and invest the $100 when it becomes available each month. Then, one option would be to take the first year's savings and purchase a certificate with a four-year rate. After the first year, take money and purchase a certificate with a three-year rate, and soon.
There are always different challenges and approaches. One person's needs can change so quickly that it's almost impossible to apply some of these advertised, global solutions. There are other variable investments, but they can entail more of a risk.
As for government loans, you should not assume that they are more difficult to close than conventional loans. Some loans of all types do not go smoothly for unforeseen reasons. And loans guaranteed by the Office of Veteran Affairs (some with no-downpayment options) and insured by the Federal Housing Administration have been streamlined over the years. Much of the red tape is gone, and local lenders can write the loans without getting approval from the agencies.
Can't wait five years to save? Want to explore home ownership as soon as possible? Here are a few suggestions:
-- Find a friend to buy with you and co-sign the loan. Perhaps the friend has access to the down payment and you honestly feel you can make the monthly payments. You both take title to the property, so make sure you have a written agreement with the co-signer that ensures you own a specific portion of the property.
-- Offer a lease-option. You pay a small payment up front, usually non-refundable, to the seller for the option to buy the home on a specific date for a specific price. This method can be viewed as renting with a huge first and last month's rent and a non-refundable damage deposit. It's a benefit to the buyer because it gives him time (typically a year or two) to improve his salary. The method benefits the seller because the option money is not taxed until either the option is exercised or it expires. In the interim, the seller can depreciate the house. -- Parents as partners. This does not necessarily mean asking the folks for the down payment. The folks can lend their name or money. The method is popular with parents who want to help their children find an alternative to college dormitory living. By taking an ownership share, the parents get some tax benefits by renting their share of the house to their children. Because both are co-owners, both parties share in resale profits and the children establish credit. -- Keep the seller on the title. You move in, pay as much down as you can, but keep the seller as co-owner to help qualify for a mortgage. Set up an agreement that gives you title on a specific date after you've paid off the seller or refinanced. The point is that if you can save $100 a month, you need to find a way to become creative while minimizing risk.
Tom Kelly, former real estate editor for The Seattle Times, is a nationally syndicated columnist and talk show host.