Home-Buddies

Loan Programs and Down Payment Assistance

By Ray Peña, Texas Loan Officer

Can anybody say damage control? Housing bill, H.R. 3221, which has passed both the House of Representatives and the Senate this very past week, has been signed by President Bush today. This bill is set up to stabilize the housing market and prevent as many foreclosures as possible. This has also set up the Federal Housing Administration (FHA) for a modernization of sorts. FHA is positioning itself to be the “silver lining” for housing professionals and consumers who are looking to help shore up the housing market.

So now this ties in with our follow up from last weeks article. Loan programs and down payment assistance programs are this week’s topic. There are still several loan programs in the market place to help borrowers with their mortgage needs. It is important for borrowers to have an initial consultation with a mortgage professional to determine their financial situation with regard to credit, income, assets and housing needs.

We condensed the different loans in to three categories with brief explanations. For more information about a specific product reply to this post and we can get you the information you need.
Government Loans

• FHA - Insured by the Federal Housing Administration, fixed rate, 3% down payment
• VA – Insured by the Office of Veterans Affairs, fixed rate, sometime no down payment
• RHS – Rural Housing Service guaranteed by the Department of Agriculture, low down payment

Conventional Loans

• Conforming and Non-Conforming Loans – conforming loans fall under Fannie Mae and Freddie Mac guidelines and requirements. Single family maximum loan amount $417,000
• Fixed Rate Mortgages – Interest rate locked for the term of the loan. Loan terms: 15, 20, 30, 40
• Jumbo – non-conforming loan type because does not follow Fannies Mae or Freddie Mac guidelines, higher rates
• Balloon Mortgage – Principle amount due at end of agreed term, 3, 5, 7, 10-20 year terms

Exotic Sub-prime

• Adjustable Rate Mortgage (ARM) – low rate to start then adjusts. Amortized for 30 year term
• Negative Amortization – this loan program adds un-paid interest to the principle to pay over the life of the loan.
• Option ARM – This type of loan gives borrower’s option to pay minimal interest payment or fully amortized payment. Can cause a negative amortization, but can free up cash, depending which payment borrower makes.

As you can see, there are many loan options in the market depending on the borrower’s needs. Some are sophisticated financial tools, that if understood and utilized correctly, benefit the borrower, but on the other hand can spiral out of control and lead to financial devastation – sub-prime.

Another part of the new housing bill that has come into questions is down payment assistance programs (DPAs). There is language in the new housing bill to terminate such programs, if so, after October 1, 2008; these programs will no longer be available.

DPAs were developed by nonprofit organizations to help low to middle-income families afford the down payment requirement for their home purchase. This is an explanation of how it works: The nonprofit wires funds to the title company before closing, and the buyer closes on the house. Then title company wires exact amount out of seller’s proceeds of the sale to nonprofit. Nonprofit then charges a fee for the transaction that goes into a pool of funds used to assist other families. Fannie and Freddie guidelines allow gift funds from a family member, local government, and qualified sources to assist buyers with down payment.

Here are the links to the programs typically used for down payment assistance:

Nehemiah – www.getdownpayment.com
AmeriDream – www.ameridream.org
The Genesis Program – www.thegenesisprogram.org

The issue with down payment assistance programs is based on studies cited by FHA Commissioner, Brian Montgomery, in a speech at the National Association of Realtors Regulatory Issues Forum in Washington, D.C. Tuesday, May 13, 2008, that families who rely on “seller-funded down payment assistance” go to foreclosure 3x the rate of borrowers who used their own funds. No doubt that this is or was a heated debate, however, more than ever, it is important for potential homebuyers to educate themselves on the home buying process.

Once again, come back next week when we will talk more about documents needed for loan and the loan process.

Ray Peña is a mortgage consultant for Nation’s Bankers Mortgage in Houston, TX. Ray is a native Houstonian whose office is located in the Houston Heights. Feel free to contact Ray at raympena@gmail.com