How to transform cash-short renters into homeowners PTC

SMART MOVES

January 24, 1993|By ELLEN JAMES MARTIN

Call it the "rental merry-go-round."

You've got the income. You've got the inclination. But you don't have the cash to buy your first home. So, instead you go around in circles, making your rental payments month after month.

"Money is the lubricant that makes everything happen in real estate. If you don't have the down payment to borrow money, nothing will happen," says Gary Suggars, an agent with Coldwell Banker's Charles Street office in Baltimore County.

The buyers with whom Mr. Suggars works are mostly young, mostly eager to buy yet, also, mostly cash short. Because they aren't savers by habit, more than half of Mr. Suggars' first-time buyers must find a novel approach to raising cash for a home.

"We're not a society where people save money -- this is not Germany or Japan. If you're going to get a first-time buyer into a house, you have to be a little creative," he says.

*

Here are three strategies for young prospective homebuyers who are cash short:

* Strategy No. 1: Eat your cake now and buy it later.

Have you found a home you'd like to purchase but lack the down payment? Do you have enough discretionary income to save but need a compelling goal to force you to put away money for a home? Are you expecting a large tax refund, inheritance or other windfall in coming months?

Then why not sign a sales contract for the home of your choice with an agreement that defers closing for six, nine, or even 12 months? The agreement should allow you to move into the property well before closing under a "pre-occupancy" provision.

There are many ways to structure such an agreement. Usually, the buyer pays a generous rent to the seller during the pre-occupancy period. Sometimes the seller agrees to put part of the rent premium into an account for the buyer's down payment. Often, the buyer must put a deposit on the property that can be kept by the seller if the deal doesn't go through as promised.

This strategy is completely legal and appeals to many homeowners seeking to sell in today's buyers' market. Although he can't liquidate his property quickly under this scenario, the seller can expect the delayed gratification that comes from knowing he has either a sure sale or the chance to keep a sizable nonrefundable deposit. The owner also gets a revenue stream from the rent paid during the pre-occupancy period.

This setup is better for the seller than having his property languish unsold for months while he pays the carrying costs. It's also better for the seller than the typical rent-with-option-to-buy agreement that usually doesn't lead to a sale.

For his part, the buyer gets either a forced savings program or a compelling reason to save, or both. He also gets to reside in the property of his choice while he's either saving for the purchase or waiting to collect a windfall that will make it all possible.

"This can be a win-win way to buy a house," says Mr. Suggars, the Coldwell Banker agent. Still, he and other real estate specialists caution that such a deal must be structured to satisfy all the requirements of the buyer's mortgage lender, as well as local law, or it could become an aborted deal.

* Strategy No. 2: Get a mortgage with just 3 percent of your own money down.

Normally, the makers of conventional mortgages are steadfast in their demand for a minimum 5 percent down payment derived solely from the homebuyer's own funds -- not from gifts or loans of any kind. The idea is that a buyer with his own money invested in the property will be less likely to default on his mortgage payments.

But for borrowers with few blemishes on their credit reports, a new 3-2 program is available. Designed to help those with moderate means buy a home, the program allows borrowers to make a down payment with only 3 percent coming from their own funds. The remaining 2 percent, closing costs and prepaid expenses, may be in the form of a gift from a relative, employer or local government agency.

"It's not a program for marginal buyers. It's a program for qualified buyers with marginal assets," says John Lloyd, the Lutherville branch manager for Sears Mortgage Corp.

Using the name FirstDown, Sears is one of numerous lenders now making loans under federal guidelines for the 3-2 program. The program was originated by federally sponsored organizations that buy billions of dollars' worth of mortgages on the secondary market.

* Strategy No. 3: Sell your car. Fresh out of high school or college, buying a good car is a top priority for many people. But as they work their way through their 20s and into their early 30s, quality housing becomes more of a priority. Most are restless to get out of a rental unit.

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