Many homebuyers have become overwhelmed by all the questions to ask before jumping into homeownership — especially first-time buyers and those who have stayed put since the recession. Questions arise such as, “Am I ready? Is this a good investment for me? Can I afford it?”
Perhaps the biggest concern is how to pay for such a large purchase.
For example, first-time buyers often cannot afford a large down payment. According to data from the National Association of Realtors Confidence Index, about two-thirds of first-time buyers made a down payment between zero and 6 percent.
In 2009, 77 percent of down payments were in the zero to 6 percent range. The number of small down payments today is lower than in 2009, but it’s higher than this time last year when 61 percent fit that range.
One option for homebuyers is down payment assistance (DPA) programs. These can be unpopular because of all the hoops that the buyer has to jump through.
DPA requires separate applications, separate loan approval and, because these typically require outside approval, they take time. At closing, they will result in a separate lien on the property and must be repaid at the point of resale or refinance in the future.
Also — as with Georgia Dream, for example — the homebuyer must take a class on homeownership prior to qualifying and getting approval for DPA, and qualifying income has a small maximum amount.
I wanted to share some information regarding a down payment assistance program that seems to work well whether or not your client is a first-time buyer. The program, called NHF Platinum, is through the National Homebuyers Fund, and it’s offered through participating mortgage lenders.
We receive a lot of requests for info on DPA from buyers, and prior to this program, the only option we had available was through Georgia Dream. Georgia Dream limits a buyer to those who have not purchased a home in the past three years. The National Homebuyers Fund guidelines apply to all buyers — whether they have owned a home before or not.
General information on NHF Platinum
- Can be used with FHA, USDA, VA and conventional loan programs
- 640 minimum credit score
- 45 percent maximum debt-to-income ratio
- Max income limits based on 115 percent of area median income (can vary by county)
- Funds can be used for down payment and closing costs
- Approval contingent on availability of funds from NHF
- Amount provided is a percentage of the loan amount
- 5 percent for FHA and VA
- 3 percent for conventional and USDA
Funds provided are in the form of a grant that never needs to be repaid. The program has one application, based on standard underwriting with no outside approval required. The closing time frame is the same as with a standard program. The lender provides funds at closing then is reimbursed by the servicer, which means no delay in closing. The most interesting thing is that the buyer does not ever have to repay the grant.
Now, if it sounds too good to be true, it must be, right? What’s the catch?
I think the hardest part of this that might be understanding the interest rate. The rate is half to three-quarters of a point higher. Personally, I think, the FHA version would be the only reason to consider it unless the buyer didn’t have the funds to cover their closing costs and the seller will not negotiate those into a contract.
Does it make sense? For most buyers I work with, the goal has always been to have the absolute lowest interest rate they can get.
If it is true that most people on the average sell about every five to seven years, what is the breakeven in this scenario? Does it make good financial sense to get into a home rather than wait until you can save the down payment?
Looking at the following examples:
|Down Payment Source||Purchase Price||Down Payment||Mortgage Rate||Payment (P&I)|
So depending on loan amount, in these two examples there is roughly a $75-$100 per month increase on a house payment, so it would take about six or seven years, depending on the scenario, to get to a breakeven point.
There are more benefits than this, and the breakeven is further out because this rate is based on a 5 percent grant. This means our buyer would have another 1.5 percent of the grant to use toward closing costs, which would save them $2,250-$3,000 at closing.
Pricing on the 3 percent grant is better by a quarter to half a point. However, remember that both scenarios resulted in the same loan amount. Meaning both the buyer who brought their own 3.5 percent down payment to closing and the one who used an NHF grant had equal “equity” in their respective property at closing.
Once again, this is not just for first-time homebuyers, but for any buyer who hasn’t got the down payment to close.
Sure, there are going to be those who might respond to this post and proclaim with righteous indignation that people should save more, have more skin in the game, etc. But an estimated rental income on a $150,000 property in our market would cost roughly $1,191 per month to rent. Including taxes, insurance and mortgage insurance, it would cost about $949 per month to buy a property with a $150,000 sales price.
It’s affordable to the buyer who had been paying more to lease a house as compared to buying it. This is not hearkening to an area of “prebubble” loan guidelines. A few differences in the lending climate today that are more stringent than in the good old “subprime” days are verification of rental history, credit, income and debt ratios. This idea makes sense. It increases ownership opportunities for more people.
As I see it, buyers whose ownership horizon is three to five years out are in a favorable position because at closing they have 3.5-5 percent equity built into the purchase.
I have seen many lender marketing strategies come and go over the years that seemed gimmicky. However, to me, this idea streamlines the process and helps put people into homes to take advantage of all that homeownership has to offer each of us and our families today.