6. Home Buyer Assistance
A Helping Hand
Buyer assistance is a topic that I’m very experienced with in my home State of California.
Today, as I write this article, there are many areas of California that are out of reach of buyer assistance programs due to high home prices.
In the areas that are eligible, there are some fantastic assistance programs that most buyers should have access to. More on that below!
It is not uncommon for many of the local buyer assistance programs to be temporarily funded.
For the purposes of painting with as broad a brush as I can, I have some strong opinions about buyer assistance that I would like to share.
Buyer assistance programs can be a great “helping hand” when you have no other options. And sometimes, you’re at the right place at the right time, and there’s an affordable housing opportunity you can’t refuse.
The following article is based on almost 10 years experience specializing in buyer assistance programs in the State of California.
You will have to research the assistance programs available in your community, this is not meant to be a detailed guide to any one specific assistance program.
Instead, I will do my best to help you understand the “nature” of buyer assistance, and different strategies that save money.
What is a Purchase Money Loan?
Buyer assistance programs are typically tied to a specific purchase money loan, “based on” either a Fannie Mae conventional, or FHA government insured loan.
I mention “based on” because very often, these programs have overlays. Overlays are guidelines that are more strict, or deviate from standard underwriting guidelines.
The most common examples of these restrictions are income, and loan limits when applying of buyer assistance.
Before you will know if you are eligible for buyer assistance, you have to first qualify for your purchase money loan. Assistance programs typically offer down payment, and closing cost assistance.
Your purchase money loan approval is still required before you are able to explore buyer assistance programs.
Buyer Assistance Features
Buyer assistance programs tend to have different nuances that make them more restrictive than traditional financing. These restrictions are how the programs are able to reach the target demographic that the program was created for.
Buyer assistance programs are designed to target low to moderate income families that have challenges saving up both down payment, and closing costs required to own a home.
I like to call these programs, “Keep Your Cash” Loans. It’s important to understand that buyer assistance programs are not free.
Many programs require a higher interest rate on the purchase money loan, most require the buyer pay origination fees, which typically does not ever happen with traditional financing.
A certain percentage of the “buyer assistance” you receive will be applied to the additional costs associated with the program that you would not find with traditional financing.
There is a time and a place for buyer assistance programs. Going into the education process well prepared to ask informed questions is about the best head start you can get!
Let’s take a look at some of the common features and traits of buyer assistance programs. Keep in mind, much of my personal experience is with programs available in California.
While many of the characteristics of other buyer assistance programs are similar, please do your homework, ask the hard questions, and make sure you’re making financially sound decisions based on being fully informed and educated about your options.
These are arranged in alphabetical order, not order of importance, and are sorted just for easier reference.
Podcast Episode: How Homebuyer Assistance Works
Community Reinvestment Loans (CRA)
FDIC insured depository banks are required to offer a certain percentage of home loans in low to moderate income areas at a significant discount. These loan programs are also known as CRA (Community Reinvestment Act).
These loans used to be much more widely available in the marketplace, but now are limited to depository banks for availability of those programs.
I have recently found a bank in the State of California that will allow me, a mortgage broker, to offer a “CRA like” program to any home buyer in specific zip codes in Los Angeles County.
I met this bank at a local affordable housing roundtable that brought together government officials, non-profits, and local real estate professionals.
I was very optimistic about some of the things that are being worked on to make it easier than ever for consumers to find, and take advantage of available buyer assistance programs.
Equity Recapture Clause
I’ve seen this most often with local County or City assistance programs that offer a big chunk of money toward the down payment of the home.
Essentially this clause says that before paying the assistance off, you must also share a part of the increase of equity, if any. I have had one experience with this.
Many years ago, I had a home owner that wanted $25,000 to remodel his kitchen and other rooms in his home.
During the process of figuring out how much he owes on the silent assistance program he had used 7 years earlier, we discovered that the equity share part of the payoff was twice what he was trying to borrow.
We ended up not being able to help because it would have required he borrow an additional $75,000 to have $25,000 for home improvements. The payment would have been too much.
Most of my experience is with a Statewide program in California called the NFH Sapphire Grant. This grant is unique compared to other grants in California because it is not restricted to a geographic area other than the State.
And maybe more significant is the fact that this is the only buyer assistance program I’ve found that allows you to use standard FHA debt to income ratios.
Buyer assistance programs are designed to give “low to moderate income” homebuyers the ability to buy a home without liquidating your savings. Many programs I’ve seen will use the Area Median Income (AMI) as the baseline for the income limits for the program.
When using multiple assistance programs, be aware that the most conservative underwriting guidelines will apply. For instance, if one program has an income limit that is lower than another program, you will be restricted to the lower income limit if you absolutely need both programs.
Also be aware of how a buyer assistance will calculate income. Sometimes they have income calculation requirements that are different than standard Fannie Mae or FHA underwriting guidelines. The biggest difference being how you calculate overtime, bonuses, and income from other members of the household.
It is not uncommon for a loan officer without a lot of experience with a specific buyer assistance program may miss the income calculation rule until after your well into escrow and it’s discovered by the underwriter.
My point is….ask about how income is calculated. If your loan officer has experience with buyer assistance programs, they will know what you’re talking about.
Last thing to keep in mind is that many assistance programs will offer increased income limits based on the number of people that will live in the household. This is a great “loophole” that experienced loan officers will catch right away.
Conventional or FHA purchase money loans are limited to a maximum conforming loan amount or the FHA loan limit, whichever is less.
FHA loan limits are determined by County – CLICK HERE for FHA Loan Limits Nationwide
It is also not uncommon for there to be different loan limits based on whether or not the area you are buying in is a targeted, or non-targeted census tract. If you need to find the census tract for a home you live in, or are interested in buying, you can look up the census tract number here.
Mortgage Credit Certificates (MCC)
These little gems are not often used, even when available. A mortgage credit certificate is only available at the time that you buy your first home. You cannot go back after your purchase and apply for a mortgage credit certificate, it has to be done with the purchase.
I can show you how the State of California Housing Finance Agency Mortgage Credit Certificate program works if you’re willing to do a little extra reading.
Want cliff notes? Save thousands a year in taxes for as long as you have your original loan. It is possible to keep the tax benefit through a refinance, and it is important you understand that if that is your plan.
Additional MCC Reading:
- How do Mortgage Credit Certificates Work – An Introduction
- First Time Homebuyers Get Immediate Tax Benefits
Rates and Fees
It is not unusual for a buyer assistance program to require that you use a specific purchase money loan that is a “package deal” with the assistance piece.
It is also not unusual for the interest rates and fees on those loan programs to be set by the assistance program itself, and to be slightly higher than what is available in the market.
The biggest challenge with elevated fees and fixed rates is that there is no flexibility like there is with traditional financing.
Silent Subordinate Loans
This is the most common assistance that you will find at your local Housing Finance Authority (HFA). You may be eligible for a buyer assistance as a second, third, and even fourth position liens against your property.
This isn’t necessarily a bad thing, some of these programs have 0% interest for the life of the loan. These programs also do not typically have payments associated with them.
Where the “silent” part comes in, is that there is virtually nothing to remind you that these liens are against your home. If you have to sell, or would like to refinance to remodel your kitchen, or a couple of bathrooms, you may find yourself in a position where you have to pay back those loans before being able to refinance.
When you refinance, these loans are simply added to the new loan amount, and you begin making payments as part of the new first mortgage.
A Smarter Way to Pay Costs and Save Money
Many of the available buyer assistance programs will cover all, or most of the required down payment, but do not leave enough to cover all of the closing costs. If you do not have the additional money saved, you may get it as a gift, or ask the seller to pay for your closing costs.
Asking the seller to pay for your closing costs is a strategy that really only works in a strong buyer’s market. As I write this, September 2016, we are firmly in a sellers market in terms of the number of buyers in the market, compared to the number of sellers.
Lender Credit – I often speak to homebuyers that initially had their heart set on buyer assistance, until we had a thorough conversation about it. If you can come up with the down payment, savings, retirement, gift, your lender can pay all of your closing costs.
Using a program like Fannie Mae’s HomeReady loan, you can put as little as 3% as a down payment, and pay discounted mortgage insurance. If you are using FHA financing, that down payment is only 3.5% of the purchase price.
This is also the case if you do not qualify for buyer assistance for some other reason, like income or loan limits.
A lender credit is available to pay your closing costs when you choose a slightly higher interest rate.
The reason why this strategy is so effective is that the interest rates and terms of many buyer assistance programs means that you can generate almost as much assistance, with no liens, no payments, no paperwork.
In most cases, you can generate enough credit to pay all of the closing costs, and still have an interest rate that is lower than the rate that is required if you use assistance.
Buyer Assistance Warning
In almost all situations, I recommend that you do everything in your power to avoid using buyer assistance programs. There is no such thing as “free money”.
The costs to using buyer assistance range from higher interest rates and closing costs, to equity share clauses that require you to pay the program provider a percentage of the equity you earn in your home if you ever sell or refinance the home.
In addition to higher costs associated with buyer assistance programs, the processing times for these programs will often cause delays during loan approval process, and delay the close of escrow.
As long as you allow ample time, and if you have no other options, Buyer Assistance programs can help you over the hurdle of coming in with the upfront cost of covering your down payment and closing costs.
Before you consider a buyer assistance program, exhaust all other options, including:
- A gift from a relative
- Selling personal property
- Tax refunds
- 401k loan
- Seller concessions (closing costs only)
- Lender credits (closing costs only)
- Realtor credits (closing costs only)