Where do you start? A Washington D. C. issued memo came out of the blue indicating the formally allowed homebuyer assistance plans would not stand as practiced. The foreclosure rates had soured in this segment of the market and it was thought by the “know it all” bureaucrats that they would just eliminate it. Glass half full or half empty?
If you have 5% or higher FHA loans going into foreclosure is it prudent to throw the baby out with the bath water or would it be better to coach up and counsel the buyers to slow down the default rates. Many feel this was a knee jerk reaction to a program that had worked for many years to provide first time homebuyers ready access to the American dream, owing their very own home. Many of the original players are positioning and fighting against the directive from the bureaucrats to outlaw all homebuyer assistance programs, which are NOT government entities. A funny thing happened on the way to eliminating these homebuyer assistance programs. By definition, Indian Tribes ARE government entities. So…if an Indian Nation within the United States decides to set up a Homebuyer Assistance Program…then who is to say now that a government entity cannot conduct business as such. All have witness the power of the Indian Nations to conduct business in the U.S. unabated with regard to fishing, gambling, their own courts, lands, etc. Now, The Penobscot Tribal Nation has set up a Homebuyer Assistance Program. If anything, this has set the bureaucrats on their ear. The bureaucrat’s left with scratching their collective heads, the program is rolled out to help FHA first time homebuyers.
What follows is an example how this program might work for a first time homebuyer using the FHA (Federal Housing Administration) through the Department of Housing and Urban Development (HUD).
James and Laticia have been living in a two-bedroom apartment for three years. They have two young school age boys and a sonogram in hand that indicates there is a baby sister on the way. The two-bedroom apartment will not accommodate two young boys and a new baby sister. James and Laticia received something in the mail regarding a homebuyer assistance program. Recognizing that the housing market is now weak in their town, it will be necessary to get the seller of a selected property to pay all the closing costs and prepaids and make a 3% contribution to the non-profit Penobscot Tribal Nation’s homebuyer assistance program. In spite of all the good intentions they have not been able to accumulate any significant savings for a down payment and connected cost with buying a home. James and Laticia have spent the last couple years paying off collections and delinquent hospital bills surrounding the two pregnancies for the boys. At the time, they did not have health insurance. Now both have new jobs in the same line of work making good money and can stretch the rental payment up to qualify for a bigger housing expense. Fortunately, both are covered with full health insurance and the pregnancy will be taken care of in full with no deductible. With the parental leave for the new birth coming soon it’s important for James and Laticia to find a home of their own soon. They are now on a month-to-month rental status.
Every available weekend James and Laticia look at homes on the market. The Realtor named Jesse has laid out a plan using this very homebuyer assistance plan. When searching for homes Jesse looks for vacant homes that can offer quick possession and have high motivation to sell. Some might be a property in foreclosure, real estate owned (REO) by a bank or lending institution or an owner whom must sell and has already moved on. Before even showing a home, Jesse calls the listing Realtor to determine whether the seller will be willing to pay all the closing costs and prepaids (which can be up to 6% of the purchase price). In addition to paying all the costs for a buyer the seller must also be willing to make a 3% contribution to the homebuyer assistance program plus a small administrative fee, which is all sponsored by the Penobscot Indian Nation a non-profit corporation. If a seller is not willing to chip in, James and Laticia look at other homes. Jesse explained there is no need to waste any time with an unmotivated seller. There are plenty more motivated sellers in this buyer’s market who are willing to sell and do whatever is necessary to get the home sold as Jesse laid it out the buying strategy.
Jesse was charged with finding a four-bedroom home with two baths or more and a two-car garage with room for a pool later on. Jesse called James and Laticia excited with the news that he had located such a home and the seller was game to pay all the costs. The selected home that was in the school district and area that was a top priority for James and Laticia. When James and Laticia rolled up in front of the home it had good curb appeal. Some recent work had been done to spiff up the property. The bank had taken this home back six months ago through a foreclosure action and it was still back on the market. The home had an open floor plan and all the interior paint had been freshened with neutral colors. The appliances were new and had stainless steel finishes. The refrigerator, range and dishwasher all matched and were the same brand. The flooring had also been replaced with a neutral color with new tile installed in the bath and kitchen areas. The knobs and hardware in the kitchen were replaced. The bank was obviously interested in moving this property ASAP. A year ago, first time homebuyers were second-class citizens in the market place as far as asking for financial concessions and such. The worm had turned now. Buyers were king again.
James and Laticia loved the home and asked Jesse to write up an offer. Human nature being what it is, they decided to cut the offer price $10,000 from the listed price plus seeking major concessions. The list price was $215,000.00. The offer was constructed for $205,000 using FHA financing. The seller was asked to pay up to 6% of the offered price for closing costs and prepaid expenses which would be $205,000 x 6% = $12,300.00. All FHA financed deals must have a 3% contribution from the buyer. This would be $205,000 x 3% = $6,150.00. Although the required down payment could be as low as 2.25% the total required contribution from the buyer was 3% for down payment and costs. James and Laticia didn’t have $6,150 in cash lying around and there was no prospect of any family gifts or help. The seller was asked to pay 3% additional to the non-profit homebuyer assistance program plus a small administrative fee of approximately $400.00. At closing the seller would make a 3% contribution plus the administrative fee to the “Government sponsored entity” per the Penobscot Indian Nation. Upon receipt, the homebuyer assistance program would send 3% of the contract price to the closer to be used for the buyer down payment all for the cost of the administrative fee.
It took a week to get an answer. Jesse explained the buyer’s financial situation and the fact that they had been pre-qualified for a FHA mortgage using this device and they could not fit a higher price into their family budget. It was a take it or leave it deal. The bank/seller decided to take it. The details broke down as follows: The price was $205,000.00. There would be 3% down thanks to the homebuyer assistance program sponsored by the Penobscot Indian Nation. The balance of $205,000.00 x 97% = $198,850.00 would be the base loan amount before the Up Front Mortgage Insurance Premium is added on. The UFMIP is at 1.5%. Thus, $198,850.00 x 1.015 = $201,832.75 rounded to $201,832.00 with the 75 cents paid in cash at closing. The taxes are $3,600 per year or $300/month. The hazard insurance is $2,400/year or $200/month. With an FHA there is a monthly Mortgage Insurance Premium (MIP) of .5%. This would amount to the first month payment of $201,832 x .5% = $1,009.16/year or $84.10/month. With a 6.00% 30-year rate, the payments would be $1,210.08/month. Adding the taxes, hazard insurance and MIP the total payment would be $1,210.08 Principal and Interest + $300/mo. taxes + $200/mo. insurance + $84.10/month MIP = $1,794.18/month for the total payment. As James and Laticia had paid off all their installment debts and medical collections and other adverse credit items the debt ratio was just under underwriter requirements. In this case the debt ratio came in at 28.9% for housing expense with plenty to spare on overall debts. With James and Laticia total monthly income at $6,208/month combined income the numbers worked for the underwriter. The payment shock was considerable from the apartment to the new home, but past residual income was utilized to pay the collections and debts on an accelerated basis. Now the earmarked funds could be used to meet their monthly obligations.
At day of closing, the 3% down payment was provided by way of the seller through the conduit non-profit established through the Penobscot Indian Nation. The seller paid the buyer’s closing cost which included 1% origination fee, title fees, lender fees, survey, termite report, home inspection, etc. The prepaids for tax escrows and the first twelve months of advanced insurance payment and two month’s reserves as well as prepaid interest were all set up from the 6% seller contribution of $205,000 x 6% = $12,300.00. By agreement, the buyer’s paid for the FHA appraisal of $375.00. That was really their only out of pocket except for the earnest money deposit of $1,000 which was returned at closing to the buyer.
The buyer’s were able to use whatever cash available for moving and ordinary fix up expense in moving in.
It’s been two month’s since James and Laticia moved in. Baby Rose has arrived and is lovingly set up in the newly decorated and furnished nursery. A knock at the door indicates Jesse has arrived for a small house warming for the family. Without Jesse’s efforts and the usage of this special government homebuyer assistance program (non-profit sponsored through the Penobscot Indian Nation) this purchase would have not happened for James and Laticia. Prior state homebuyer assistance programs had long since dried up of available funds. This program allowed these buyers to take advantage of a depressed housing market. The home market is forever shifting. Right now, advantage buyers.
This little known homebuyer assistance program can help FHA homebuyer move into a home of their own. The Penobscot Indian Nation steps up to help.