However, and most pertinent, Section 1006 (e) of ARRA also eliminated the prohibition of the Borrower’s access to the federal First-Time Home Buyer Tax Credit if their loan was financed with Mortgage Revenue Bonds (MRBs).

The CHFA FirstStep and CHFA FirstStep Plus programs, made available on February 1, 2010, are funded with MRBs. Many ARRA or federal First-Time Home Buyer Tax Credit-related websites have not been updated to highlight this specific provision of the law; however, the actual IRS Form 5405 has been updated to reflect this change. Click here to read complete ARRA bill as written.

The Wynn Team has found that the National Association of Home Builders website created for the First Time Home Buyer Tax Credit has the most comprehensive information and the best FAQ page of any other site.  By the way, they have updated the MRB inclusion.

This is important because qualified first time home buyers who need down payment assistance and want to take advantage of the First Time Home Buyer Tax Credit before it goes away can finance a home with competitive market rates.

Lending A Hand

Marla Wynn

The Wynn Team

We received a call from a potential customer, referred to us by a real estate agent we work with, who was looking to get qualified for a home price of about $400,000. He had just received a large inheritance and was debating on exactly how much to put down on the home. He had a figure in mind but wanted to run the numbers. Here is how the numbers played out at his figure of $250,000 down:

Pretty good payment for a $400,000 house!  Now that we know what it would look like based on the number in his mind, we started to play with the numbers a bit.

First let’s look at how much you can save for every $1,000 you put down.  Through a simple mortgage calculator you can calculate how much $1,000 over a 30 year loan, fixed at 5% will change your monthly payment.  It comes out to $5.37/mo.  What this means is that for every $1,000 you put down your principal and interest payment will decrease about $5.37/mo.  In this example, he is putting $250,000 down or $236,000 more than the minimum (minimum is 3.5% or $14,000).  That means that the monthly principal and interest savings is about $1,267.32 (236 X $5.37).  5% is a great rate and historically very low, so let’s look at some other examples based on average 30 year fixed mortgage rates from Freddie Mac:

• 2009 Average= 5.04% or $5.39/mo per $1,000 down
• 2000 – 2009 Average = 6.29% or $6.18/mo per $1,000 down
• 1972 – 2009 Average = 9.28% or $8.25/mo per $1,000 down

When people see these figures they are normally very surprised how little $1,000 down will impact their payment.  There are certainly other factors to consider though.  Probably the biggest factor to consider is mortgage insurance. Mortgage insurance protects your lender and is required when you put less than 20% down on a mortgage.  There are 2 main types of mortgage loans and the monthly mortgage insurance amounts vary for each:

• FHA – 1.75% Up-Front Mortgage Insurance Premium (Changing to 2.25% Apr 5)
  • .55% of loan amount divided by 12
• Conventional
  • 5.00 to 9.99% Down Payment = .94% of loan amount divided by 12
  • 10.00 to 14.99% Down Payment = .62% of loan amount divided by 12
  • 15.00 to 19.99% Down Payment = .38% of loan amount divided by 12

These mortgage insurance factors add a level of complexity to calculating the savings of putting more down.  Let’s look at the monthly payment of principal, interest and mortgage insurance at different amounts down:

Based on this table you can see that by putting down an additional 5%, or $10,000, you save more than just the $5.37/mo, calculated in the first example. The difference between Conventional 5% and Conventional 10% is $109.51 instead of the $5.37/mo per $1,000 down calculation of $53.70. This is because of the drop in the MI factor dropping from .94% to .62%.

Getting back to our example with this gained knowledge we know that a 20% down payment should be the least amount the customer should consider.  This will allow him to avoid paying mortgage insurance and provide him the biggest bang for his buck.  From there it became a decision of personal choice and calculating whether to put money down or invest with a better return on his money.

Rather than redo all the calculations on this question, I will direct you to check out Get Rich Slowly who wrote a post titled Ask the Readers: Is it Better to Invest or Prepay a Mortgage.  The great thing about this post is that it not only gives you great resources for making this decision but also gives you the calculations and opinion of others.

My customer decided that even though he may be able to get a better rate of return in the stock market or other investments he still wanted to put the full $250,000 down.  Ultimately you are the one that needs to determine what is best.  Mathematical calculations will likely show it is better to invest than to buy down the mortgage but the emotional side of having the security of a low monthly mortgage payment can weigh heavily on this decision.

Lending A Hand

Scott Wynn

The Wynn Team

1. FirstStep & FirstStep Plus
2. No Gifts Allowed for Minimum Contribution
3. No Cosigners Allowed
4. Non-Traditional Credit Must Be Added to Credit Report
5. Risk Score Card
6. No Grossing Up Income

1.  FirstStep & FirstStep Plus

Two new (well a modification from an older CHFA program called MRB First Step) programs to be available starting February 1, 2010.  This program will provide first time buyers, and qualified veterans, with a low interest rate fixed mortgage or down payment assistance in the form of a second mortgage.  This product is funded through the sale of non-taxable mortgage revenue bonds.  What this means to buyers is that typically the rates for these mortgage options are either below market rates or very competitive considering a second mortgage option for down payment assistance is available.

Rates have not yet been released but as they are we will be sure to communicate what they look like.  For additional details you can check out the CHFA website at www.chfainfo.com.

2.  No Gifts Allowed for Minimum Contribution

Effective February 1, 2010 CHFA will no longer allow the borrower’s minimum contribution of $1,000 to come from gift funds.  This will be verified through a 2 month history of bank statements to show the funds were theirs and did not come from other sources.

3.  No Cosigners Allowed

This is not a huge change to CHFA rules.  Up until now CHFA allowed cosigners but the borrower had to qualify independently without the help of the cosigner…what is the point of a cosigner then??  Well, to avoid further confusion CHFA has now eliminated cosigners from being allowed on CHFA mortgages.

4.  Non-Traditional Credit Must Be Added to Credit Report

CHFA is now going to require that any non-traditional credit (credit that is not being reported to a credit bureau – i.e. cell phone, auto insurance, utilities, etc) being used for qualifying must be verified by a credit reporting agency and added to the credit report.  This is something that your mortgage lender will assist with and not something the buyers will do themselves.

5.  Risk Score Card

CHFA has always been one of the most aggressive lenders when it comes to assisting borrowers who have had credit challenges in the past.  CHFA has done well with this approach through homebuyer education requirements prior to closing.  In fact, their foreclosure rate is a fraction of the national average.  To continue to keep their default rate low, CHFA is now requiring lenders to complete a risk score card for all borrowers with a credit score between 580 and 619.  In order to qualify there must be some compensating factors to show that you have the ability to make the payments despite some credit mishaps in the past.

6.  No Grossing Up Income

A common approach for lenders is to gross up income that is not taxed (social security income, child support, etc) since taxable income is used at gross amounts rather than net amounts.  CHFA is no longer going to allow this when qualifying for their mortgage loan options.  Very rarely will this impact someone’s qualifications but something lenders need to know when assisting their customers in qualifying for a mortgage.

Lending a Hand

Scott Wynn

The Wynn Team

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

Marla Wynn

The Wynn Team

• FHA will permit certain entities to use the current authority to offer tax credit advances in the form of second liens with the following conditions:
  • The tax credit advance can not result in cash back to the customer
  • The second lien can not exceed the total amount for the down payment, closing costs and pre-paids
  • The second may be silent (not requiring a payment) or require a payment
  • If the second requires monthly payments the payments must be included when qualifying for the mortgage
  • Payments must be deferred for a minimum of 36 months to not be included in the qualifications
  • If the tax credit advance has a short term for repayment, it must also provide if the borrow fails to repay by the designated deadline, principal and interest payments begin automatically or the loan converts to a silent second
  • The second may not require a balloon payment within ten years

• FHA will permit FHA approved nonprofit organizations as well as Federal, State and local government agencies may purchase the tax credit with the following conditions:
  • The proceeds from the sale of the tax credit may not exceed the anticipated tax credit due to the homebuyer
  • The borrower must submit a signed certification that the tax credit is not subject to offset due to other indebtedness
  • A copy of the borrower’s tax refund must be obtained and included with the mortgage financing
  • Fees related to the purchase of the tax credit should not exceed 2.5% and must be reduced from the anticipated tax credit
  • The tax credit may not be used as down payment if the purchaser of the tax credit is an interested party (lender, seller, real estate agent, etc)

For the full letter and details you can be found on HUD’s website.

How Does this impact Colorado Housing and Finance Authority (CHFA)?

Plain and simple – it doesn’t.  Here is the eNews provided by CHFA today:

CHFA JumpStart Clarification

There has been much confusion and rumors in the past few weeks regarding the CHFA JumpStart loan program and its compatibility with FHA insurance. This confusion arose when the FHA issued Mortgagee Letter 2009-15 on May 11, 2009, then recalled it on May 12, 2009. 

Friday, May 29th, the FHA issued a new 2009-15 Mortgagee Letter clarifying its guidance on how the Federal First Time Tax Credit may assist eligible borrowers purchase a home. 

The CHFA JumpStart Loan Program complies with the FHA guidelines and is eligible for FHA insurance. 

However, there is a provision in the Mortgagee Letter that allows all FHA-approved mortgagees and FHA-approved non profit organizations, and local government agencies and instrumentalities to purchase the tax credit anticipated by the homeowner. To be clear, CHFA is not purchasing the borrower’s anticipated tax credit. CHFA is providing a second mortgage to be used for downpayment and/or closing cost assistance. CHFA encourages the borrower to use the tax credit to repay the second mortgage while in a zero (0%) percent interest deferral period. If not repaid by June 30, 2010, the CHFA JumpStart second mortgage becomes an 8%, 10 year term loan with required monthly payments. 

Because of this provision, CHFA will not approve any borrowers who have “sold” their tax credit to use the CHFA JumpStart Loan Program. These borrowers will be eligible for the CHFA HomeOpener program. 

If you have any questions about CHFA’s JumpStart or HomeOpener program please contact us.

Other Options

At this time we are unaware of any nonprofit organizations or government agencies providing second liens or tax credit advances.  As we hear anything we will be sure to update you here.

Lending A Hand

Scott Wynn