FHA and Down Payment Assistance: It’s Truly Gifted

Down Payment Assistance programs are designed to assist a home buyer with their 3% minimum investment on an FHA loan. It’s a nice gift to get!

If you qualify for an FHA loan to buy a home, traditionally you should be prepared to come up with 3% of final sales price in out of pocket funds to put down on the transaction. It’s a requirement. You can’t really get around it in on a home loan purchase. You can finance 97.75% of the loan amount, but you still have to have the remaining 1.25% of the aforementioned to put toward closing costs. Anyway you look at it, you need 3%.

Well, all is not forsaken. There is another way to come up with the 3% that doesn’t require hawking grandma’s pearl necklace or selling your 2nd car. There are down payment assistance programs out there to lend a helping hand. They can be considered a “gift”, and they are available for FHA loans that are single family and 1-4 unit dwellings. The two big names are AmeriDream, Inc. and The Nehemiah Program, and they provide these gift funds to qualified homebuyers.

How much in gift funds can be made available to you? 1% to 6% of the final contract sales price or a flat gift amount not to exceed 6% of the final contract sales price. And, in addition to the gift from AmeriDream or Nehemiah, the seller can contribute between 1% and 6% of final sales price toward the borrower’s closing costs. So, here’s the big secret, you can basically obtain an FHA loan with little or no down payment if you qualify.

How is this scenario possible? Well, it all depends on the deal you’re getting on the house. Basically, the seller is financing the down payment gift by not netting as much on the sale of the home. The seller or the lender also must pay the “down payment processing fee”, so your closing costs are going to go up $350-500. But, if you are buying a home below the lender’s appraised value, it can work!

Here’s an example. Say John and Susie Homebuyer have excellent credit but no cash to put down on a property. They are working with a great realtor who finds a home for sale that’s worth $120,000, but it’s generally acknowledged the seller will accept around $100,000 for it. The closing costs will run about $4500 (including the gift processing fee) and John and Suzie must invest $3,000 (3% of $100K) of their own money in the transaction per FHA guidelines. So, John and Suzie offer the seller $107,500. The seller agrees to participate in the Down Payment Assistance program and contribute $3,000 toward the buyer’s closing costs. This contribution becomes the “gift.” In addition, the seller agrees to pay $4500 in closing costs. The seller nets $100,000 from the transaction as anticipated, and the buyers pay the 3% down payment via a “gift” from AmeriDream or Nehemiah. The appraisal comes in comfortably above asking price and everyone’s happy.

The down payment assistance programs mentioned are large and respected community development programs, and they are a great deal for homeowners if they qualify and the seller agrees to contribute. With sellers willing to make sales concessions lately, it’s an excellent market for AmeriDream or Nehemiah. It’s critical that your realtor understand that you want to utilize these programs when you negotiate. Make sure they are aware of it and if need be, have your loan officer and realtor communicate with one another prior to house hunting. It’s also useful to have your lender prepare a good faith estimate for you prior to making an offer on a specific home so you can make sure all your numbers work and the offer is worded correctly with all the proper forms attached. And the good news is the programs still work with some of the competitive first time homebuyer programs out there like Tennessee Housing Development Agency with below market rates (but you don’t have to be a first time homebuyer).

So, who says you can’t get 100% financing anymore?

Let My Experience Work For You!

Email your home loan financing questions to Kristin Abouelata, Home Loan Specialist with Mortgage Investors Group, at question@kristinmortgage.com or call
direct: (865) 567-0113
Toll Free: 1-800-489-8910.

For more information visit her website at http://www.kristinmortgage.com/ Home Loans Plain Talk.
Truth and Lending, Mortgage Rates, home loan financing, credit reports, Home Loan Plain Talk, Mortgage Specialist, Kristin Abouelata

Telling the Truth about Mortgage Lending

How can you really figure out what exactly your paying in finance charges if you keep that mortgage for 30 years? What's another tool to use in comparing mortgages? Check out your Truth in Lending document.......

There’s a bunch of important points to review when considering a mortgage. And a ton of paperwork to look over. So much so at times it can be quite overwhelming. A Good Faith Estimate is one document to consider, and many people focus solely on it. But, in 1968, our lawmakers wanted to make sure lenders made it clear to the consumers just exactly what they were paying and that this information was consistently disclosed lender by lender. And for that, we have the Truth in Lending document, created by the Truth In Lending Act and outlined by Regulation Z.
The Truth in Lending document, or TIL as it’s affectionately known in the Biz, tells the consumer a lot about what he/she is getting into. It tells so much so that it can confuse a person, too. Thus, it is important to know and understand what it tells you. It allows one to make an informed decision. A TIL should be part of the beginning of the loan process and the end. When it’s all said and done, a mortgage customer should have reviewed an estimated TIL before closing, and then have also signed his/her final TIL at loan closing. The information found on the estimated TIL shouldn’t be too far off from the final TIL. If it is and you don’t understand the explanation for it, it’s time to put on the brakes.
A TIL will reflect your loan amount, interest rate and the amortization of your loan. A TIL comes in a standard layout, and most TILs will look the same from a distance, though there may be a few variations, like a payment reflection, lender’s logo, etc. But the nuts and the bolts should be identical in format.
The main thing you notice about TILs is they all have four boxes containing numbers stretched across their horizon. These boxes don’t mean much to you until they’re explained. But these are important numbers, which is why they are so blatantly highlighted in these little boxes. They shouldn’t be brushed off. If the TIL is an estimated or intial TIL, you’ll see a little “e” by the numbers in the boxes. Pretty straight forward - “e” means estimate. The final TIL you sign at closing should reflect all the numbers on your HUD-1 settlement papers and the “e” should be gone. That means you’re signing the final, real McCoy that is calculated by your final numbers.
The first box on the TIL reflects the Annual Percentage Rate (APR) or cost of your credit expressed as a yearly rate. Don’t panic, this rate is not your interest rate. It is the rate that the closing costs are actually costing you annualized over a year, and generally it is higher than your interest rate. However, if your mortgage is locked at a 5% interest rate, but your APR rate is 10%, you should reconsider the deal or get a second opinion. You’re paying too much.
The second box is the Finance Charge or the dollar amount the credit will cost you. It is the total amount of interest calculated at the interest rate over the life of the loan, plus Prepaid Finance Charges and the total amount of any required mortgage insurance charged over the life of the loan. The third box reflects the Amount Financed or the total amount credited to you on your behalf, minus Prepaid Finance Charges.
The fourth box is the one that gets most people’s attention - the Total of Payments. It’s the amount that a customer will actually pay back in principal, interest (and mortgage insurance, if applicable) if they keep the loan for the full term and stick to the outlined amortization schedule. Ouch. People find this number a little incredulous. I guess it really sends it home that mortgage lending is a business, and some company is going to make some money from it.
There are three other things on a TIL I like to point out to a customer. One is the late payment penalty. People need to know what it will cost them if their check gets to the Servicer late. It’s usually 4% or 5% of the monthly principal and interest payment, depending on the loan type. Another VERY important feature a lender should point out to a customer is if there is a PRE-PAYMENT penalty on the loan. A pre-payment penalty means that if you pay the loan off before a pre-determined time, you pay for the luxury of doing so. Make sure you know the terms of the pre-payment penalty if you should have one, and that you are certain you can live with it. They can be quite costly. Finally, the TIL tells you that should you pay off your loan early, you won’t be entitled to any of your closing costs or interest being refunded. In other words, don’t expect to get any of the money you have already paid back.
Simple enough, right? To tell you the truth, it is confusing, even for a mortgage lender. Take time to understand this document and ask all the questions you have regarding it. Don’t be shy.