If you have FHA loans of 5% or more going to foreclosure, is it wise to throw the baby out with the bathwater or would it be better to train and counsel buyers to reduce default rates? Many feel this was a knee-jerk reaction to a program that had been in place for many years to give first-time homebuyers easy access to the American dream, with their own home. Many of the original players are positioning themselves and fighting against the bureaucrats’ directive to ban all homebuyer assistance programs that are NOT government entities. A funny thing happened on the road to eliminating these homebuyer assistance programs. By definition, Indian tribes ARE government entities. So…if an Indian nation within the United States decides to establish a Homebuyer Assistance Program…then who is to say now that a government entity cannot conduct business as such? They have all witnessed the power of Indian nations to conduct business in the US endlessly with respect to fishing, gambling, their own courts, land, etc. Now, The Penobscot Tribal Nation has established a Homebuyer Assistance Program. If anything, this has put the bureaucrats on the ear. Bureaucrats collectively left scratching their heads, the program is put in place to help first-time FHA homebuyers.
The following is an example of how this program might work for a first-time homebuyer using FHA (Federal Housing Administration) through the Department of Housing and Urban Development (HUD).
James and Laticia have been living in a two-bedroom apartment for three years. They have two young school-age children and a sonogram in hand indicating a baby sister is on the way. The two-bedroom apartment will not accommodate two small children and a new baby sister. James and Laticia received something in the mail about a homebuyer assistance program. Recognizing that the real estate market is now weak in your city, the seller of a selected property will be required to pay all closing costs and prepayments and make a 3% contribution to the non-profit Penobscot Tribal Nation homebuyer assistance program. Despite all the good intentions, they have not been able to accumulate any significant savings for the down payment and the cost associated with buying a home. James and Laticia have spent the past two years paying bills and delinquent hospital bills related to the children’s two pregnancies. At the time, they did not have health insurance. Now they both have new jobs in the same line of work that make good money and can stretch their rent payment to qualify for a bigger housing expense. Fortunately, both are covered with comprehensive health insurance and the pregnancy will be taken care of in its entirety without a deductible. With parental leave for the new birth coming soon, it is important that James and Laticia find a home of their own soon. They are now in a month to month rental status.
Every available weekend, James and Laticia search the market for houses. Real estate agent named Jesse has come up with a plan using this very homebuyer assistance plan. When he’s looking for houses, Jesse looks for vacant homes that can offer quick ownership and have strong motivation to sell. Some may be a property in foreclosure, real estate owned (REO) by a bank or lending institution, or a homeowner who must sell and has already moved. Before even showing a home, Jesse calls the listing agent to determine if the seller will be willing to pay all closing and prepayment costs (which can be up to 6% of the purchase price). In addition to paying all of a buyer’s costs, the seller must also be willing to make a 3% contribution to the homebuyer assistance program plus a small administrative fee sponsored by the Penobscot Indian Nation, a non-profit corporation. If a seller is not willing to contribute, James and Laticia look for other houses. Jesse explained that there’s no need to waste time with an unmotivated salesperson. There are many more motivated sellers in this buyer’s market who are willing to sell and do whatever it takes to sell the house as Jesse presented the buying strategy.
Jesse was tasked with finding a four-bedroom home with two or more baths and a two-car garage with room for a pool later on. Jesse called James and Laticia excited to learn that he had found such a home and the seller was willing to pay all costs. The selected house that was in the school district and the area that was a priority for James and Laticia. When James and Laticia arrived in front of the house, it had good curb appeal. Some recent work had been done to improve the property. The bank had repossessed this house six months ago through a foreclosure action and it was still back on the market. The house had an open floor plan and all interior paint had been refreshed with neutral colors. Appliances were new with stainless steel finishes. Matching refrigerator, stove, and dishwasher were of the same brand. The flooring has also been replaced with a neutral color with new tile installed in the bathroom and kitchen areas. Kitchen knobs and hardware were changed. The bank was obviously interested in moving this property as soon as possible. A year ago, first-time homebuyers were second-class citizens in the market when it came to asking for financial concessions and such. The worm had turned now. Shoppers were king again.
James and Laticia loved the house and asked Jesse to write an offer. Human nature being what it is, they decided to reduce the offer price by $10,000 from the list price, in addition to seeking significant concessions. List price was $215,000.00. Offering was built for $205,000 using FHA financing. The seller was asked to pay up to 6% of the offered price for closing costs and prepaid expenses, which would be $205,000 x 6% = $12,300.00. All FHA financed transactions must have a 3% contribution from the buyer. This would be $205,000 x 3% = $6,150.00. Although the required down payment could be as low as 2.25%, the total required buyer contribution was 3% for the down payment and costs. James and Laticia did not have $6,150 in cash and there was no prospect of any gifts or family help. The seller was asked to pay an additional 3% to the non-profit homebuyer assistance program plus a small administrative fee of approximately $400.00. At closing, the seller would make a 3% contribution plus administrative fee to the “government sponsored entity” according to the Penobscot Indian Nation. Upon receipt, the homebuyer assistance program would send 3% of the contract price to the seller to use for the buyer’s down payment, all for the cost of the administrative fee.
It took a week to get a response. Jesse explained the buyer’s financial situation and the fact that they had been pre-qualified for an FHA mortgage using this device and could not fit a higher price into their family budget. It was a take it or leave it deal. The bank/seller decided to take it away. The details were broken down as follows: The price was $205,000.00. There would be a 3% down payment thanks to the homebuyer assistance program sponsored by the Penobscot Indian Nation. The balance of $205,000.00 x 97% = $198,850.00 would be the base amount of the loan before the initial mortgage insurance premium is added. The UFMIP is at 1.5%. Therefore, $198,850.00 x 1,015 = $201,832.75 rounded up to $201,832.00 with the 75 cents paid in cash at closing. Taxes are $3,600 per year or $300/month. Hazard insurance is $2,400/year or $200/month. With an FHA there is a monthly Mortgage Insurance Premium (MIP) of 0.5%. This would equate to your first month’s payment of $201,832 x 0.5% = $1,009.16/year or $84.10/month. With a rate of 6.00% for 30 years, payments would be $1,210.08/month. Adding taxes, hazard insurance, and MIP, the total payment would be $1,210.08 principal and interest + $300/mo. tax + $200/mo. insurance + $84.10/mo MIP = $1,794.18/mo paid in full. Because James and Laticia had paid off all of their installment debt and medical billing and other bad credit items, the debt ratio was just below the insurer’s requirements. In this case, the debt ratio came in at 28.9% for housing expenses, with much to spare in general debt. With a total monthly income for James and Laticia of $6,208/mo combined income, the numbers worked out for the subscriber. The payment shock was considerable from the apartment to the new house, but past residual income was used to pay off collections and debts in an accelerated manner. Now the allocated funds could be used to meet your monthly obligations.
On closing day, the 3% down payment was provided by the seller through the non-profit organization established by the Penobscot Indian Nation. Seller paid buyer’s closing cost, which included 1% origination fee, title fees, lender fees, survey, termite report, home inspection, etc. The prepayment for tax security deposits and the first twelve months of advance insurance payment and two months reserves, as well as the prepaid interest, were established from the seller’s contribution of 6% of $205,000 x 6% = $12,300.00. By agreement, the buyer paid the FHA appraisal of $375.00. That was really his only outlay except for the $1,000 security deposit that was returned to the buyer at closing.
The buyers were able to use whatever cash was available for the move and the recurring repair expenses of the move.
Two months have passed since James and Laticia moved in. Baby Rose has arrived and is lovingly ensconced in the newly decorated and furnished nursery. A knock on the door indicates that Jesse has arrived for a small house for the family. Without Jesse’s efforts and the use of this special government homebuyer assistance program (sponsored by a non-profit through the Penobscot Indian Nation), James and Laticia would not have made this purchase. Previous state homebuyer assistance programs had long since run out of available funds. This program allowed these buyers to take advantage of a depressed housing market. The domestic market is changing forever. At this time, the advantage buyers.
This little-known homebuyer assistance program can help FHA homebuyers move into their own home. The Penobscot Indian Nation steps up to help.
dale rogers
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