TheMReport — News and strategies for the evolving mortgage marketplace.
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Th e M Rep o RT | 21 Feature Th e M Rep o RT | 21 H ome" is such a meaningful word. To some, it means watching their kids laugh, cry, play, and grow into young adults. To that child, home may mean comfort and a place to always go for love. To others, home means a place to plant a garden, grill out in their backyard, or host annual holiday gatherings for friends and family. For most, home means starting and carrying out traditions. Many renters are waiting and dreaming of owning a home in the next two years. According to data released by the Pulte Group, 89 percent of renters think owning a home is part of the American Dream. If owning a home is central to the American Dream, then, why are so many renters not buying a home right now? Dispelling Down- payment Myths A ccording to a New York Times article, 50 percent of all renters spend more than 30 percent of their income on housing; up from 38 percent in 2000. With renters spending so much of their income on housing, they may be better off putting their hard earned money into their own home. Future first-time homebuy- ers believe they need a down payment as high as 20 percent to qualify for a mortgage. This is not the case. Traditional first mortgage programs have low down payment requirements. On the conventional side, only a 3 percent down payment is required and on the government side only a 3.5 percent down payment is required. And, to fill in the gap, there are local city, county, and statewide affordable housing programs that help low- and moderate-income first-time homebuyers with the down pay- ment requirements and even help with closing costs. In these pro- grams, the borrower can come to the transaction with little-to-no out-of-pocket expense. According to a joint analysis between RealtyTrac and Down Payment Resource (DPR), 87 percent of U.S. homes qualify for down payment help. Down pay- ment and closing-cost assistance helps make buying a home pos- sible for more people, yet many homebuyers aren't aware of the options available. The Lender's Role S o, how to do these renters find out about the down pay- ment assistance programs? DPR is the nation's only Web-based ag- gregator (DownPaymentResource. com) of homebuyer programs and simplifies the process for searching for affordable housing programs. Lenders and consum- ers can use the Web-based tool and search by city or address for public and private-funded down payment programs, including affordable fixed-rate mortgages, community second mortgages, grants, tax credits, and more. Homebuyers can quickly access a list of available programs for which they may qualify. Lenders are in an ideal position to find a homeownership pro- gram that fits a potential home- buyer's needs. As they are already collecting information about the prospective homebuyer to qualify for a loan, lenders can also find out more about their household characteristics and any profession- al or other special circumstances that may help qualify them for a homeownership program. Lenders can search to find out what programs are in their market and contact the program provider to learn how to become a participating lender. When lenders create more awareness about the programs available in their area, they can drive more consumers to investigate their home financ- ing options. Buyers may also be able to buy sooner when they use a down payment program. Common Assistance Programs T here are many state, county, and city government agencies (and some non-profits or even employers) who design affordable housing programs for low-to-moderate income residents in their communities. The types of affordable housing programs come in many forms. The most common are Community Second Programs (CSP), Mortgage Credit Certificates (MCC), and even non-repayable grant programs. A CSP is a second mortgage or deed of trust that is recorded against the property and it pro- vides down payment assistance to the borrower. The programs sometimes offer anywhere from 3 percent of the purchase price up to 50 percent depending on the agency. In high cost markets such as on the West coast, as- sistance can get up to $50,000 or more. The large CSPs are often referred to as gap financing. An MCC program offers low-to-moderate first-time homebuyers a federal tax credit of up to $2,000 annually for the life of the loan to assist in achieving homeownership. MCCs are not mortgages; they are tax credits effectively putting extra cash in the borrower's pocket each month so the borrower can more easily afford the housing payment. MCC programs have multiple benefits to the borrower: • MCCs reduce federal income tax the borrower pays annually; • MCCs tax credits "effectively" reduces the interest rate on the mortgage loan; and • MCCs allow more available income to qualify for mortgage due to reduction in tax liability. An MCC works by enabling a first-time homebuyer to take a direct dollar-for-dollar tax credit on their federal income tax return, based on a portion of their mortgage interest paid annually. The tax credit has the potential to save the homebuyer thousands of dollars over the life of the mortgage loan. A tax credit is not the same as a tax deduction. Tax credits directly reduce the amount of federal income taxes paid by giving the borrower a discount in the amount of taxes owed. This simply helps increase disposable income to qualify for a loan and meet mortgage payment obligations. The percentage of credit does have a range, usually between 15 percent and 25 percent. Borrower Eligibility E ach program has its own eligibility requirements. Many programs require the borrower to be a first-time homebuyer, which essentially means they have not owned a home within the past three years. Another common set of requirements is income and sales price limits. Depending on the program, the borrower usually has to be below 80 percent or 120 percent of the average median income for that geographic area. Also, these programs usually require homebuyer education and, of course, the home needs to be owner occupied. There may be other qualifying factors depending on the program. "Many buyers assume down payment programs offered by state and local housing authorities are only for lower income candidates, but there are programs available for middle- income buyers, too. In fact, there are programs that cover a variety of non-income-based eligibility criteria," said Rob Chrane, CEO of DPR. Robert Hirt, CEO of mortgage lender RPM "