“No-money-down” borrowing, also known as 100 percent loan-to-value loans, became the standard way that a majority of first-time homebuyers financed their homes in the last five years. Many buyers qualified for mortgages that required only $500 of their own money with the rest of the down payment and closing costs coming from mortgages, grants or seller-paid closing costs.

The era of no-money-down borrowing has ended. Reacting to the mortgage industry crisis caused by increasing defaults across the country, especially on subprime loans, and widespread home price declines, most lenders have discontinued 100 percent financing. Lenders have begun requiring a minimum 5 percent down payment from the borrower’s own funds in areas with home price declines, such as the Washington, DC, metropolitan area. Federal government data indicates home prices in the DC market fell an average 2 percent in 2007 versus 2006, qualifying the area as a “declining value” and “distressed” market.

A 5 percent down payment means that the buyer of a $250,000 home has to put $12,500 down from their own funds. For current DC residents who are first-time buyers, the District government’s Home Purchase Assistance Program (HPAP) second mortgage can cover this requirement, lending up to $70,000 depending on a family’s income and household size. However, if the HPAP loan and the purchaser’s contribution to the down payment from their own funds isn’t at least 20 percent of the purchase price ($50,000 on a $250,000 property) the buyer will need mortgage insurance, often called MI or PMI. Effective March 10, due to mortgage insurance company changes, most all lenders began requiring that purchasers in the DC area who were obtaining mortgages greater than 80 percent of the purchase price had to pay at least 5 percent of the purchase price toward the down payment from their own funds. HPAP funds cannot cover this.

Even if the HPAP second mortgage is 20 percent of the purchase price so that no PMI is required, some lenders now will not allow HPAP to provide additional funds to pay closing costs, capping the first mortgage and the HPAP second mortgage at the amount of the purchase price. Thus the buyer has to come up with the closing costs, which can be as much as 3 percent of the sales price, or $7,500 on a $250,000 home. Property sellers, lenders, nonprofit organizations and government programs can sometimes pay part or all of the closing costs.

What does all this mean for new homebuyers and existing homeowners?

While some lenders may still offer 100 percent loans or combinations of two loans, for example an 80 percent first mortgage and a 20 percent second mortgage, these loans have become more expensive and more difficult to qualify for, requiring higher credit scores or more money in the bank in reserves. One significant opportunity for help will come from the Federal Housing Administration (FHA) loan program that currently requires 2.25 percent down payment, but which Congress has proposed reducing to a zero percent down payment. Final action on the “FHA Modernization” bill is expected as early as April, with loan availability a couple of months after the law changes.

Homebuyers should shop around for their best alternatives and recognize that the loan terms offered today may no longer be available in a few weeks or months. Buyers will have to look for ways to come up with the down payment and closing cost funds. Sources include savings, gifts from family and borrowing from retirement accounts although the latter should be only a last resort. Current DC residents should explore the HPAP program by contacting one of the community-based organizations listed below which serve as HPAP intake centers. These organizations will help buyers find out how much they might qualify for on an HPAP second mortgage and the steps in the application process.

Home sellers need to understand the limitations on down payment and closing cost assistance available for buyers and think creatively about pricing their homes to allow sellers to assist buyers with closing costs. Most loan programs allow the seller to pay closing costs up to 3 percent of the purchase price. Recent mortgage loan program changes mean that buyers preapproved last year may have trouble being approved for the same loan this year, so making a purchase or sale subject to a loan approval takes on new importance for both buyers and sellers.

Community-Based Organizations for HPAP Intake
Call Housing Counseling Services, 2410 17th St. NW, 202-667-7006; Latino Economic Development Corporation, 2316 18th St. NW, 202-588-5102; Lydia’s House, 3939 South Capitol St. SW, 202 373-1050; Marshall Heights Community Development Organization, 3939 Benning Road NE, 202 396-1200; or University Legal Services, 220 I St. NE, 202-547-4747 and at 3220 Pennsylvania Ave. SE #4, 202-581-0600.