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Strategy to Overcome Down-Payment Hurdle

Half of Americans don't think they will ever be able to save for a down payment.

BOSTON (TheStreet) --Historically low mortgage rates and attractive home prices provide no comfort to those who think they can't afford a down payment.

"In my 25-plus years of experience, the most difficult obstacle for first-time homebuyers has always been accumulating the necessary funds for the down payment and closing costs," says Joe Heisler, president of the New Jersey Association of Mortgage Brokers.

In a recent poll of 2,000 consumers by the National Foundation for Credit Counseling, 49% said they will

never

be able to save enough for a down payment. Only 12% said they would have no trouble coming up with a 20% down payment right now.

"People are afraid," says Gail Cunningham, a spokeswoman for the NFCC in Silver Spring, Md. "Even if they haven't lost their jobs, they've read the headlines, and even if they haven't lost their retirement accounts, their parents have. Our idea of spending again is still more likely to be another trip to

Wal-Mart

(WMT) - Get Report

than a decision to buy a house."

If Americans reined in discretionary spending, they could afford a down payment sooner than they think they could. A recent

Zogby International

survey commissioned by

zendough.com

found that 57% of more than 2,000 respondents don't follow a personal-spending budget or only sometimes follow a budget every month.

"Sadly, most people think budgets are for 'poor' people," says Robert McDonald, principal at

Mass Mortgage Group

in Medford, Mass., and a board member of the Massachusetts Mortgage Association.

He said that, even for those who can afford a down payment, the failure to save wisely often carries through the life of the mortgage.

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"During the 20-plus years that I have helped people refinance their mortgages for the purpose of reducing their monthly cost, I have never had a client refinance for the purpose of saving or investing the savings or applying it toward the principle to reduce the overall cost of their mortgage or other debt," he says. "They have refinanced for the purpose of obtaining a few hundred dollars more a month that they could apply toward new debt that was taken on for the purchase of something else they wanted or

thought

they needed."

The data in the following graphs reflect the average per-capita quarterly expenditures for consumers in the U.S., New York and San Francisco. The statistics come from Mint.com, a Web-based personal-finance-management service that has access to the financial records of more than 3.5 million American customers.

There's also a common misconception among would-be homeowners that a 20% down payment is mandatory. That amount is ideal because it helps homeowners avoid private mortgage insurance (PMI).

Still, there are other options. Federal Housing Administration (FHA) loans can be had for a down payment of as little as 3.5% of the cost of a single-family house. (Consumers need to consider that there are significant closing costs involved in buying a home.) Veterans Administration loans, available to veterans or to surviving spouses of veterans who died in active duty, often require no down payment.

"VA and FHA lost a lot of market share going back several years when you could get 100% financing with no PMI, but FHA is now about 30% of the market," says Heisler of the New Jersey Association of Mortgage Brokers. Requests for VA loans has tripled in the past few years, he says.

That said, lending restrictions are still tight, and NFCC's Cunningham says it behooves some people to be grateful for that.

"If a person runs into a roadblock along the way to buying a home, that roadblock may be there as a protection to them," she says. "I don't want people beating themselves up for missing out on this historic buying opportunity. Renting is not all bad, and people need to understand that if now is not the right time for them, tomorrow may be."

-- Reported by Carmen Nobel in Boston.

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