In This Chapter

No one should be denied the opportunity to fulfill the American dream and own his own home. There are programs designed to help low-income and minority groups become home buyers. As a mortgage broker, you will still earn fees for each of these loans, and there is the added satisfaction of helping others.

In this chapter, we’ll review the requirements that low-income borrowers must meet and the programs that are available, and look closely at the subprime mortgages that have become an alternative method of financing.

Helping low-income and minority clients buy a home is more complicated, but also an incredibly satisfying experience. Don’t get me wrong. I absolutely relish finding the right loan to help a client buy a mansion with a putting green in his yard, and I earn every dime of the deal. But I also take pride in helping families navigate the tricky path to home ownership when at first glance they don’t seem to qualify.

Fannie Mae’s 2003 National Housing Survey sheds light on the complexity of the problem. It found four critical areas that must be addressed in order to reach the underserved and close the minority homeownership gap.

There is a significant difference between the general public and the minority communities in their levels of accurate understanding about buying a home. It’s especially pronounced among Spanish-language dominant Hispanics. This group is referred to as Spanish Hispanics; English-language dominant Hispanics are called English Hispanics.

This information gap showed up in their responses to the survey that questioned respondents on the home-buying process. For example:

Not only is there a real difference in how much minority groups can save for a house, there is also a perception that they can’t afford to buy a home, despite various programs designed to help.

While cost is the number-one reason why renters report they haven’t bought a home, credit concerns is the second leading reason (39 percent). Credit concerns are an even bigger issue for minority households: 49 percent of English Hispanics, 46 percent of Spanish Hispanics, and 42 percent of African Americans cite credit concerns as the number-one reason they haven’t bought a home.

Minorities have less confidence in their abilities to complete the home-buying process than the general public. The confidence gap is magnified because minorities are especially concerned about discrimination and future home price increases.

Measuring confidence on a scale of 1 to 5, English Hispanics were nearly as confident as the general public (3.8 as compared to 3.9) that they could complete the home-buying process, but African Americans (3.6) and Spanish Hispanics (3.4) were definitely less confident.

African Americans were more concerned that they would encounter discrimination during the home-buying process (3.4 as opposed to 4.0 for the general public). Spanish Hispanics were the least confident group about obtaining a mortgage (3.2 compared to 3.9 for the general public) and worried more about finding a real estate professional (3.1 compared to 3.5 for the general public).

Fannie Mae is committed to investing $2 trillion over the next 10 years to create 6 million new homeowners, including 1.8 million minority families. It’s part of the company’s American Dream Commitment, which also has goals of helping families keep their homes, and expanding the supply of affordable homes where they are needed most.

Fannie Mae’s Community Home Lending mortgage products are designed to help borrowers overcome two barriers to home ownership: lack of down payment funds and qualifying income.

Remember: Fannie Mae does not make these loans directly. They come from traditional lenders. Fannie Mae sets the guidelines for qualifying for these loans and guarantees to buy pools of these loans on the secondary mortgage market.

This mortgage product has an expanded debt-to-income ratio:

The borrower only needs to put down 5 percent. The loans are for fixed rate mortgages only (no ARMS). It doesn’t waive, however, the mortgage insurance that loans made with minimal down payments require.

To qualify for the loan, the borrower must earn no more than the area median income for his Metropolitan Statistical Area (MSA) or county. That income level differs from state to state, as well as within each state depending on the locale. Specified high-cost areas permit borrowers to qualify even if they exceed the median income. For example, borrowers in Hawaii can earn more than 170 percent of the median income and still qualify for the loan.

However, the maximum income limit is removed and the down payment requirement is reduced to as low as $500 or 1 percent from the borrower’s own funds, if the mortgage is combined with FannieNeighbors, a mortgage option for eligible properties located in HUD-designated central cities, underserved areas, and eligible minority and low-income census tracts.

The borrower is not required to have cash reserves after closing, although we’ll discuss later how having cash reserves may waive another requirement.

A compulsory home buyer education session is a built-in component of this program. That requirement, however, can be waived if the borrower meets all three of the following conditions:

This is a new Fannie Mae mortgage product that may serve to make home buying more affordable. By increasing the standard loan term from 30 to 40 years, monthly payments are lower and borrowers’ purchasing power is enlarged. First-time homebuyers, or those living in high-cost areas seeking manageable monthly payments, may find this amortization term attractive.

The 40-year mortgage is eligible on both standard fixed rate products as well as standard 3/1, 5/1, 7/1, and 10/1 hybrid ARMs.

Here are some other loan programs that have been developed to encourage home ownership among low-income and minority communities. Some are designed to focus on specific communities that need revitalization, others are directed at nonprofit groups that are focused on this issue.

FannieNeighbors. FannieNeighbors is a nationwide, neighborhood-based mortgage option designed to increase home ownership and revitalization in areas designated as underserved by HUD, in low- to moderate-income or minority census tracts, or in central cities. The FannieNeighbors option adds underwriting flexibility to Fannie Mae’s Community Lending mortgage products by removing the income limit if a property is located in one of these areas. You can use the Fannie Mae Property GeoCoder, https://commlend.efanniemae.com/PropertyGeocoder, a free, online application, to determine whether a property qualifies for the FannieNeighbors option.

Lease-purchase. Lease-purchase is an option that nonprofit organizations can use to help borrowers who have successfully managed their credit obligations in the past, but have insufficient savings for a down payment. With lease-purchase, nonprofit organizations can purchase homes that can be leased with an option to buy. Part of the rent payment is saved for the purpose of accumulating the down payment and closing costs needed to buy the home. The mortgage may then be assumed by the borrower from the nonprofit at a later time, usually three to five years after the initial lease date.

Community land trusts. Community land trusts are established by nonprofit organizations to provide and preserve long-term affordable housing for low- and moderate-income families. Typically, a nonprofit organization acquires and holds land for the benefit of a community. The community land trust retains title to the land, but sells the homes under long-term ground leases to low- and moderate-income families at affordable ground rents. Community land trust properties are eligible for Fannie Mae’s Community Lending mortgages.

To find out more about community land trusts, check out the website (www.iceclt.org/clt ) for the Institute for Community Economics (ICE), which provides more detailed information on CLTs. This includes a CLT model, examples of CLTs, a list of current CLTs, and frequently asked questions. Members of ICE developed the CLT concept in the 1960s and continue to be among the industry leaders in this field.

There are several grant programs that help potential home buyers who can afford the monthly payments of a mortgage, but don’t have the funds for a down payment and closing costs. Typical assistance ranges from 1 percent to 7 percent and does not have to be repaid. Funds can be used for the down payment or closing costs. They can be used for new or existing homes, but cannot be used to refinance or make home improvements.

HUD doesn’t issue formal approval of gift programs by charitable organizations. The burden is on the lender to work with a reputable program that meets HUD requirements. If your client is working with a down payment gift assistance program, check with the lender to make sure that it is acceptable.

Here’s how these programs generally work:

Why would a seller want to participate in this kind of program? He’s hoping for a better deal. My mother used to say, “Sometimes you got to spend money to make money.” Let’s look at it this way. Most sellers build in some leeway in their asking price, but have a bottom line that is where they want to end up when they walk away from the closing table. By participating in this kind of program, the seller is hoping that he’ll attract a buyer who is more willing to pay closer to the asking price in return for this kind of down payment help. Hopefully, it’s a win-win for both sides. While the seller can’t claim the gift as a charitable contribution, he may be able to deduct it as a selling expense. He should consult a tax professional.

Some other guidelines to consider:

For the following programs, the seller pays in the amount of the gift plus a processing fee: AmeriDream (www.ameridream.org), GiftAmerica Program (www.sbrnetwork.com/giftamerica ), Homes for All Program (www.ezdownpayment.com/gift/services/buyers.asp), Nehemiah (www.getdownpayment.com/buyers/homebuyers.asp), RealtyAmerica.org (www.realtyamerica.org).

Check the websites for more information about these seller-pays programs. In the next section, we’ll discuss a federal program that offers down payment assistance but does not involve the seller.

This federally funded HUD program began in 2004. It is different from the seller pay-in programs described previously. The seller is not involved at all.

The American Dream Downpayment Act makes grants to participating jurisdictions for down payment assistance to low-income, first-time homebuyers. HUD estimated that the $200 million in grants in 2004 and 2005 would enable as many as 40,000 families to become homeowners each year.

Here are some other points to consider:

We know that lenders are interested in minimizing their risk when they make loans. The whole approval process for conventional mortgages is to give the lender a clear picture of how likely it is that the loan will be repaid in a timely fashion. In most cases, if the risk is too high, the application is rejected.

But what if the borrower were willing to pay a higher interest rate—a significantly higher rate—in order to secure the loan? Would a lender be more interested in taking the risk?

The answer is the subprime market. These are loans that do not meet the prime market underwriting standards. Subprime borrowers represent a higher risk because they fall into one of these categories:

Let’s be clear. This is an established financial market with national lenders. While you may recognize Champion Mortgage and The Money Store, two subprime lenders, many divisions of commercial banks also make subprime loans.

The underwriting guidelines for the subprime market are not standardized like the ones for conventional loans. Lenders can evaluate the risks based on their own guidelines which makes it more difficult for a borrower to shop around for a good rate.

It is a market that is growing fast, but it is also under increasing federal and state scrutiny because of the huge potential for abuse. Minority borrowers are disproportionately represented in this pool and there is concern that it’s because they are targeted for these high-interest loans, even when they could qualify for a conventional loan. The National Predatory Lending Task Force (U.S. Department of the Treasury and U.S. Department of Housing and Urban Development) found that on average, the frequency of subprime lending nationwide was three times higher in low-income neighborhoods than in upper-income neighborhoods and five times higher in predominantly black neighborhoods than in predominantly white neighborhoods.

According to a study by the Fannie Mae Foundation, “the high cost of subprime credit has prompted concerns that its rapid growth may be due in part to the sales tactics of lenders (“targeting”) or to a lack of financial sophistication that leads some classes of borrowers to pay more than necessary for credit. At the same time, high default and foreclosure rates among some subprime borrowers have prompted concerns that it may not be in the best interest of some borrowers or of the neighborhoods in which they reside for such loans to be extended in the first place.”

As a mortgage broker, your job is to provide your clients with the best deal for their circumstances. Only after you have exhausted the possibilities of a conventional mortgage should you consider the subprime market. And for some clients, a subprime mortgage or refinance may be their only opportunity for homeownership. If it is, take the time to advise your clients of all the ramifications and risks of taking a high-interest loan. Provide them with the information they need to plan for the future and develop a plan to refinance within a few years to a conventional mortgage at a better rate once they’ve restored their credit rating.

The Least You Need to Know