Neuswanger: Down payment challenged? Free money might help (column)
One of the first hurdles a homebuyer faces is the down payment, and in this day and age, that can be a daunting number. Typically, most purchase mortgages require a minimum of 3 percent to 5 percent down. On a $400,000 home purchase that means the borrower must come up with $12,000 to $20,000 down. This leaves many feeling either down payment challenged, or if they can scrape together the money, then they may feel very cash poor once they close on their new place.
Recently, our company aligned with Colorado Housing Finance Authority to offer some homebuyers cash grants for down payment and closing costs. These are not loans; they are grants, and the homebuyer does not have to pay the money back.
There are some limitations on the grant program, and not everyone can qualify. But for those who do, the grant money is tied to your first mortgage amount and can be 4 percent of the balance of the first mortgage. That balance can be (for some) 97 percent of the purchase price. Hence, you can actually get a mortgage and down payment grant money up to about 101 percent of your purchase price with balance toward your closing costs. The borrower must put at least $1,000 of his hard-earned cash into the deal.
This program will not work for everyone, and financially may not always be the best option for those who don’t really need it. The first mortgage loan is also a Colorado Housing Finance Authority loan, and in some cases, those are very competitive with conventional loans, and in some cases, they are not. It takes some serious math work to determine if this is the best option or not. There are many variables.
There is also an option for a zero-interest second mortgage loan that is repayable when the property is finally sold or refinanced.
Let’s look at an example. If a buyer is purchasing a new Chamonix Vail two-bedroom home for $400,000, then he could get a first mortgage for $388,000.00 (97 percent) and a grant for $15,520.00 (4 percent). This leaves the borrower with zero money needed for a down payment, plus about $3,500 toward his closing costs, which could include loan origination, opening escrows for taxes and insurance, title and filing fees and appraisal and credit reports.
Depending on the borrower’s individual parameters, the 97 percent might be borrowed at an interest rate of about 5 percent (closer to a point higher than conventional financing if the borrower had 5 percent down). Principal and interest would be about $2,082, or about $140 a month higher than a conventional loan. But remember, you’re getting $15,250 in free money. Mortgage insurance, taxes, homeowners insurance and homeowners’ association fees are also paid by the borrower.
If you take the loan option instead of the grant, then your rate on your first mortgage will be slightly lower. You do not make payments on the second mortgage until you sell, refinance or no longer occupy the property as a primary residence. At that point, only the original principal amount on the second mortgage loan is due, no interest is collected.
These programs are also limited to one- to two-person families making less than $89,500 gross income or $102,900 for larger families. The borrower must have at least decent credit and acceptable income levels. Typically, your housing payment and other minimum payments cannot be more than half of your monthly income before taxes. The property must be your primary residence; second homes, condo-tels and investment properties are not eligible. The subject property does not necessarily have to be a first-time home, and in some cases, the borrower might be allowed to own another property.
In addition, if the Colorado Housing Finance Authority programs don’t cut it, then we can look at the Eagle County down payment assistance programs. Those programs will lend you as much as $10,000, and interest accrues over the years with no monthly payment at the same rate your property appreciates.
These programs are complicated, and a good face-to-face sit down is best to walk through your options.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.