October 27, 1995

HELPING THE KIDS BUY THAT FIRST HOME

By Tom Kelly
The Real Estate Advisor

My folks said I would get a bed and a desk. That was it, and don't expect anything more.

They hammered home the value of education and saved and borrowed to put seven Kelly Kids through school. And, they were very clear about what to expect after that. The well had more than run dry so any "help" that remained would be those two pieces of furniture, if you wanted them. In fact, why don't you just come get them so we don't have to call St. Vinny's?

Some parents always seem to be willing to help their children, but how many folks can now realistically plop their retirement nestegg into the hands of their children so the kids can buy their first home?

There are future medical bills to consider, not to mention housing costs in retirement and that long-awaited trip to St. Somewhere.

And, in the case of the Kelly Kids, which child would get any remaining nestegg cash not earmarked for something else? There was simply no way my parents could provide even a small portion of SEVEN downpayments, or even one entire "down."

It's common knowledge that saving for a downpayment is the deepest, widest chuck hole on the road to home ownership. Lenders and huge national loan purchasers have done much creative writing to lower downpayments, especially for first-time buyers.

Now, one of the West Coast's largest lenders -- World Savings -- has followed the lead of Bellevue-based First Mutual Bank and Seattle's Continental Mortgage by offering a "pledged asset" loan where the folks -- or another relative -- can help the kids buy a home without actually spending their nestegg. Very little out-of-pocket cash is needed to close the loan, resulting in no downpayment for the entire cost of the home -- or 100 percent financing.

Here's how World's 100% Home Loan works: a relative uses his or her retirement nestegg, or other asset, and moves it to World Savings in the form of a certificate of deposit. The amount of the CD must be equal to 25 percent of the home value. Grandparents, aunts, uncles, sisters, brothers and parents are eligible to sponsor. Sponsors receive a monthly check for interest accrued on the CD.

"We are getting a lot of interest from grandparents," said Tim Grant, World Savings' Northwest manager who operates out of Bellevue. "Grandparents seem to be in a place where they are more able to help. And, even though they may be on a fixed income, they like the idea of getting that monthly interest check. As long as they don't actually have to spend the funds, they are more willing to participate."

The entire down payment does not have to be in CD form. The borrower's own cash can be used, too, as long as the loan-to-value ratio of the loan is brought down to 75 percent. Any combination of cash and CD is acceptable.

For example, let's suppose you want to buy a $100,000 home and have no cash. World Savings will loan you the entire amount, as long as grandpa, or any other primary family member, takes out a certificate of deposit of $25,000 for one year or longer. All interest earnings on the CD will belong to the sponsor who made the deposit.

No private mortgage insurance will be required, and only owner-occupied purchase transactions for single-family residences and condominiums will be permitted. These can be fixed-rate loans (30 or 15-year terms) or shorter term, adjustable-rate mortgages.

"We will also accept up to three sponsors on the same loan," Grant said. "Many people don't have enough to cover the amount of the downpayment by themselves, so two other family members can chip in. This gives the program more flexibility so that more people are able to participate."

The World 100% Loan also can be self-sponsored. This could benefit a homebuyer who, instead of refinancing the home to take cash out down the road, could forgo the costs of refinancing and have the CD released as soon as the loan is paid down or the home rises in value.

Similar "pledged asset" loans are offered by First Mutual and Continental. With lenders now exploring all options to increase their share in the home-loan market, all other local lenders are soon to follow suit.

Now, if I tapped all my brothers and sisters for a pledge, maybe my kids . . .

Previous columns:

• WSU OFFERS VALUABLE REAL ESTATE INFORMATION, 10-20-1995
• LENDERS, HOMEBUYERS SHOULD LOOK AT HOUSESEATTLE, 10-13-1995
• THE REAL ESTATE ADVISOR, 09-29-1995
• THE REAL ESTATE ADVISOR, 09-22-1995
• NEW REVERSE MORTGAGE LOAN AVAILABLE, 09-15-1995
• DISCOUNT BROKERS AIM FOR MARKET NICHE, 08-18-1995