First rung on property ladder gets harder to reach

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By Noelle Knox, USA TODAY
It's 118 degrees in Baghdad, but Peter Hudson is willing to sweat it out there, literally, for 18 more months. Why? So he can save up enough money to buy his first home back in the States -- ideally with a swimming pool.
"I'm really, really hoping for a pool," says Hudson, 32, who works for a contractor providing private and corporate security outside Baghdad's Green


By Noelle Knox, USA TODAY

It's 118 degrees in Baghdad, but Peter Hudson is willing to sweat it out there, literally, for 18 more months. Why? So he can save up enough money to buy his first home back in the States -- ideally with a swimming pool.

"I'm really, really hoping for a pool," says Hudson, 32, who works for a contractor providing private and corporate security outside Baghdad's Green Zone. By working in Iraq, he can temporarily pull in a six-figure salary that's about double what he'd earn doing similar, if much less dangerous, work in the USA.

Talk About It: How did you come up with the down payment for your first home?

For most of us, it's hard to imagine risking our lives in a war zone to afford the American dream. Yet many first-time home buyers are resorting to unusual -- though mainly non-life-threatening -- extremes to scrape together money for a down payment and qualify for a loan. A rising number are making life-changing sacrifices, such as raiding retirement accounts, taking second jobs and moving back in with Mom and Dad, according to government and industry figures.

Headlines about skidding home sales and prices portray a buyer's market for real estate. For first-time buyers, though, the view is quite different. For them, the market is more challenging now than at any time since the early 1990s.

Rising mortgage rates have eroded almost all the financial relief that buyers might have derived from the slight decline in prices in most areas. On top of that, lenders are now demanding that customers produce larger down payments, more cash reserves in the bank, higher credit scores and less debt -- all of which many first-time buyers lack, especially in high-cost states such as California, New York and Florida.

Nearly half of first-time home buyers nationwide last year put down no money, according to the National Association of Realtors, compared with fewer than one in five repeat buyers. The remaining first-time buyers put down a median of just 2 percent of the purchase price.

"I could put anybody in a loan last year," says Stephanie Gagnon, a senior loan officer at First Capital Mortgage in San Diego. But, "In the last six months, all of the big lenders are shutting down all special programs they were working with because they've realized it's bitten them."

Now, she says, "I'm turning away 50 percent of my first-time home buyers. They just can't qualify."

It's easy to say that the mortgage industry has finally returned to its senses, and to responsible lending policies, because a record 16 percent of borrowers with subprime adjustable-rate mortgages were in default at the beginning of the year. Dozens of lenders have gone out of business since the end of last year.

But the tighter mortgage market is not only shutting out borrowers with weak, or subprime, credit ratings. It's also putting pressure on first-time borrowers, who sometimes share financial characteristics with subprime borrowers: meager savings, a new job and a brief credit history (which, in effect, is equal to a poor credit history). They also may have relatively large debts, such as a car loan or student loans, which can reduce the amount that a mortgage lender will give them. And just one late payment from their college days can haunt them for years.

Broader Market Hampered

As lenders raise their standards for borrowers, the squeeze on first-time home buyers is constricting the broader real estate market and slowing the recovery. That's because about one in three homes sold last year went to a first-time buyer. As these first-timers are shut out of the market, sellers ready to move up to bigger houses have a harder time selling their homes.

In Miami, for example, where the median-price home has catapulted from $155,000 to $400,000 since the beginning of 2003, the demand for starter homes has largely dried up. Even though for-sale signs are sprouting on lawns like dandelions after a summer rain, sales of single-family homes priced below $250,000 tumbled 50% from March to May, compared with the same period last year, says Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors.

"The decrease in sales at the lower end of the market has been kind of a surprise," Shuffield says. "That's usually where we have the greatest number of buyers. It's tougher for first-time buyers to save deposits and come up with the cash necessary to close" a sale.

Which is why Chad Moskal, 33, an account executive at a printing company, gave up his apartment on the beach in Miami last summer and moved back in with his parents in Chicago. He and his brother Paul, 34, who's working two jobs as a cardiovascular technologist and has also been living at home, are buying their first house together this month. A home in Chicago, Chad Moskal decided, would be cheaper to buy than a similar one in Miami.

Continued Next Page

Copyright 2007 USA TODAY, a division of Gannett Co. Inc.

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