Jill Chodorov, an associate broker with Long & Foster, writes an occasional column about local market trends and housing issues.
Low- and moderate-income aspiring homebuyers who have been shut out of the market because of stricter lending requirements may have better luck achieving the American dream through a new 15-year mortgage with no down payment, no closing costs and no credit score check.
The loan also allows borrowers to buy down the interest rate — from their own savings, from funds provided by the seller at settlement, from government sources or gift money — lowering their monthly payment to an amount equivalent to a loan amortized over 30 years.
The Wealth Building Home Loan, introduced a few weeks ago, is funded by Bank of America and Citi Mortgage and administered by the Neighborhood Assistance Corp. of America (NACA), a nonprofit, HUD-certified housing agency. In providing subsidies to the program, the banks benefit by fulfilling their obligations under the 1977 Community Reinvestment Act. Bank of America and Citi have so far put a total of $13 billion into the program to offer discounted mortgage rates.
Getting approval, though, is far from a cake walk. The application process is designed to be rigorous, so some may find it daunting and time consuming.
The application process requires full documentation of income, assets and debt. Borrowers’ income must support their desired monthly housing payment — including principal, interest, taxes, insurance and any homeowner association fees — plus their existing debt.
Borrowers must provide a budget and bank statements for the past three to six months, a payment history and cash flow for the past 12 to 24 months, and they must demonstrate income stability.
Cindy Moses, an agent with Keller Williams Flagship of Maryland in Millersville, said she was a listing agent on another NACA loan program in the fall. “Despite performance dates in the contract for home inspection, appraisal, etc., NACA completely disregarded these deadlines. I won’t recommend to my seller clients that they accept NACA financing in an offer from a buyer,” she said.
Cameron Shosh, an agent with Century 21 Redwood Realty in Washington, agreed that NACA’s process has problems. Still, Shosh said, if you can work through it “and educate your client on their responsibilities as part of the transaction, including staying on top of the NACA rep and their time frames, you cannot get a better deal for a buyer client. No closing costs out of pocket, below-market interest rate for a 100 percent financed fixed-rate loan is nothing to laugh it, especially if your client is cash-poor.”
For their part, NACA officials say the qualification process is tailored to individual borrowers and they anticipate most NACA-approved applicants actually end up getting the loan from a participating bank.
“I don’t want homebuyers to be discouraged to go through this process,” Bruce Marks, CEO of NACA, said about the criticism made by some real estate agents. “This is something that can really help them.”
Marks said sometimes the delays come from the bank underwriters asking for additional information.
“The underwriting of our loans is flexible and character-based. We do not review an applicant’s credit score, but rather we look at their individual circumstances,” Marks said.
“This allows NACA to consider only the debts that the borrower controls,” Marks added. “For example, we would not penalize borrowers for late payments on unaffordable but necessary medical expenses. That is a reflection of the lousy health-care system in America, and not the borrowers’ ability to be a homeowner.”
What is notable (considering the great divide between political parties in Washington) is that the loan was created by an unlikely partnership between liberal-leaning Marks — a housing advocate known for getting arrested for nonviolently harassing bankers at their own homes on behalf of homeowners facing foreclosure — and two resident scholars with the conservative Washington think tank American Enterprise Institute (AEI).
Edward Pinto, co-director and chief risk officer of the International Center of Housing Risk at AEI and a former official at the mortgage financing giant Fannie Mae, and Marks originally met while participating together on a panel at a housing conference in Washington in 2008.
According to Pinto, Marks, in his signature style, “lit into” him regarding the failure of the banking system to protect homeowners against foreclosure and short sales. Pinto later invited Marks to meet for coffee, where they discussed the best way to assist Americans in achieving debt-free homeownership and a comfortable retirement.
The solution, they agreed, was to resurrect the idea that banks are in the business of helping people build wealth. Thus, they created the Wealth Building Home Loan in which borrowers could build equity quickly and lower the risk of foreclosure or short sale.
“The Federal Housing Administration’s original goal, when established in 1934, was to create ‘a straight highway to debt-free home ownership,’ ” Pinto said. “It was not an accident that the loans backed by the FHA from the 1930s to the 1960s were amortized over 15 to 20 years. A shorter-term loan builds equity much faster. Homeownership soared during that time. Unfortunately, the homeownership rate has stayed stagnant since the 30-year loan was introduced in the 1960s.”
“Most borrowers do not opt for a 15-year loan since it is perceived to be too expensive,” Pinto added. “The monthly payment on a 15-year is typically higher than a 30-year loan and, because of the higher monthly payment, the buying power is lower,” Pinto said. “We have created a way to make the 15-year loan a true competitor to a 30-year loan.”
Citi Mortgage is offering NACA-approved homebuyers in the Washington area access to this loan. The maximum purchase price allowed under this program in the D.C. area is $417,000 for a single-family home.
“Citi and NACA are both committed to promoting affordable homeownership, and our participation in this program furthers Citi’s commitment in that regard,” Mark Rodgers, Citi’s director of public affairs, said in an e-mail.
So, exactly how does the loan create wealth for a homeowner?
Pinto provided me this sample scenario to explain how it works: For a 29-year-old buyer purchasing her first home, this could add up to a net worth of more than $1.6 million by age 66, if she follows the plan.
In the first three years of a 15-year wealth-building home loan, roughly 77 percent of the monthly mortgage payment goes toward reducing the principal of the loan. Conversely, 68 percent of the monthly mortgage payment in the first three years goes toward paying interest on a standard 30-year loan.
In only 15 years, you own your home free and clear, allowing homeowners to then redirect their funds toward building up savings and 401(k) accounts.
The good news for aspiring homebuyers and current homeowners is that you can almost replicate the benefit of this loan on your own, if you are not able to qualify for the NACA loan.
Borrowers can obtain a 3 percent down FHA 30-year loan and make one extra payment on the loan each year. This can reduce the length of the loan by six or more years and shave off tens of thousands (or even hundreds of thousands) of dollars of interest over the life of the loan, depending upon the loan amount and interest rate.
It’s not too late for current homeowners to benefit from this strategy as well. You can get started now by making one extra payment per year on your loan, reducing the length of the loan and the amount of interest paid.
If you don’t have the money to make an extra payment each year, try setting up a payment plan with your lender to pay every two weeks, when you most likely get a paycheck. This translates to making an extra payment each year.
You do need to be disciplined in diverting the money designated to your monthly loan payment to a savings plan once you have paid off your mortgage.
To learn more about the NACA-sponsored wealth-building home loans, call NACA at 425-602-6222 or go to naca.com.
Previously from Jill Chodorov:
Jill Chodorov can be reached at firstname.lastname@example.org.