(All stories shared on Lending A Hand contain fictitious names with changes to insignificant details. The privacy and trust of our customers is our top priority.)
I received a call from a customer who was interested in a condo and wanted a maximum monthly payment of $1,000. We’ll call him Gaston (obviously a fictitious name). Gaston had only $1,000 to put down on the purchase of his new home.
His limited cash issues told me three things: We would need to go with an FHA loan which has a lower down payment requirement than conventional financing (3.5% vs. 5%), Gaston would need to utilize a down payment assistance program for the remaining 3.5% of his purchase price, and he would need the seller to pay the bulk of his closing costs.
Colorado Housing and Finance Authority (CHFA) always has funds available to lend to qualified buyers and they have down payment assistance programs buyers can utilize when financing their first mortgage through CHFA. Although Gaston had excellent credit, CHFA’s minimum credit score requirement is typically lower than most investors, which makes it an even more useful program. Their interest rates are currently higher, however, which is the only downfall of utilizing CHFA.
JumpStart2 is a CHFA program that would allow Gaston to borrow the 3.5% down payment and monetize the federal First-Time Homebuyer Tax Credit Program. Payments and interest are deferred until December 31, 2010 so as long as he pays the entire balance of the second mortgage when he receives his $8,000 tax credit he won’t owe any interest.
The property Gaston was most interested in purchasing was listed at a much higher price than we had calculated he could afford. He made an offer to purchase the property at a price that met his maximum monthly payment. The seller countered, but not at a price low enough for him to purchase it.
We went to work to determine if there were any other avenues we could take to bring his monthly payment down. We asked Gaston if he could put more money down on the transaction. If he were able to use his own money for down payment, we would be able to finance an FHA loan without using CHFA, which would decrease his interest rate and lower his payment.
Gaston did not have the ability to put 3.5% down so we knew we needed to use a down payment assistance program. He was purchasing in Denver so we decided to call the Colorado Housing Assistance Corporation (CHAC) program to see if they had funds available. This program would allow Gaston to utilize their funds for down payment assistance.
The CHAC loan would be a second mortgage without prepayment penalty, so although he would be paying some interest before receiving his tax refund, he could pay off the second mortgage rather quickly. In addition, we could utilize an FHA loan at a lower interest rate than CHFA was offering so he would actually be saving money on interest overall.
Gaston also made the decision to apply for the statewide Mortgage Credit Certificate (MCC) program that can help homeowners justify a larger monthly payment. The MCC program would allow Gaston to claim a dollar-for-dollar reduction of income tax liability equal to 20% of his paid mortgage interest each year he lives in the home….forever.
His credit each year was going to equate to roughly $1,670 or $139 per month. In addition to receiving the 20% credit on his federal taxes, the remaining 80% of the paid mortgage interest would continue to qualify as an itemized tax deduction.
In the end, we were able to get Gaston into the home he preferred at the seller’s counter offer price by using CHAC and an FHA loan. This lowered his interest rate and therefore, his monthly payment.
Lending A Hand
The Wynn Team