Monday, February 12, 2018 / by Abio Properties, Blogger
Let’s face it. Not everyone can be the traditionally perfect candidate for a standard 30-year fixed home loan. Some buyers need creative financing to win their dream home.
Maybe you’re a buyer who doesn’t have enough cash for a 20 percent down payment and closing costs. Maybe you have a less-than-perfect credit score.
You’re not alone. More than half of Americans have less than $1,000 in their savings accounts, according to a 2017 GOBankingRates survey. Yet, the median down payment for a home in the Bay Area is $170,000, according to the most recent ATTOM Data Solutions report.
Fortunately, innovative lenders with alternative loans are changing the home buying experience so stressed out buyers don’t have to tap retirement accounts (potentially risky), borrow from family (potentially awkward), or sell organs for cash (um, potentially deadly).
And if you are one of society’s most valued but underpaid public servants, including teachers and military vets, there are targeted loans just for you. Workers in San Francisco and newly minted doctors saddled with med school debt also can access specific loans.
Here are the latest creative financing solutions. Ask your financial advisor whether one might be right for you:
POPPY (Proud Ownership Purchase Program for You) is a no-down-payment, 100-percent financing loan of up to $2 million, available to anyone who works in San Francisco or San Mateo counties and wants to buy a home in any of the nine Bay Area counties. POPPY was created in 2015 by the San Francisco Federal Credit Union to be a game-changer for longtime renters struggling to enter an expensive housing market.
POPPY offers an adjustable rate mortgage, which means the interest rate and monthly payment are fixed for the first five years of the 30-year loan and adjusts annually thereafter. The buyer is responsible for closing costs and loan origination fees. No private mortgage insurance (PMI) is required, which otherwise could cost as much as $200-$300 a month on a high-end home.
The name might sound sneaky, but the loan is not. Silent second loans are down payment assistance programs (DPA) that often don’t have to be paid back until the home is sold, vacated, or the original mortgage is refinanced. More than 2,000 silent second programs exist across the nation and are most commonly sponsored by state housing agencies and federal Housing and Urban Development (HUD). They are usually available in regions where it’s especially difficult for buyers to enter the housing market – low-income areas or record-breaking, high-cost communities like the Bay Area. Interest rates are usually lower than average and don't compound.
Four examples of silent seconds:
- MyHome Assistance is a silent second for first-time buyers offered by the California Housing Finance Agency (CalHFA). It’s a deferred-payment junior loan of up to 3.5 percent of the purchase price or appraised value, whichever is less, for down payment and closing costs. This program must be combined with a CalHFA first mortgage loan. To qualify, CalHFA borrowers must complete homebuyer education counseling and meet income and sales price limits.
- Extra Credit Teacher Home Purchase Program (ECTP) is another silent second offered by California for teachers, administrators, and staff at any K-12 public school (including charters). First-time homebuyers who need help with the down payment and closing costs can apply for a deferred-payment junior loan of $7,500-$15,000, depending on the region. The program can be combined only with a CalHFA first mortgage loan. To qualify, CalHFA borrowers must complete homebuyer education counseling and meet income and sales price limits.
- Chenoa Fund is a relatively new silent second for buyers who qualify for a Federal Housing Administration (FHA) mortgage loan. The Chenoa Fund helps FHA borrowers cover the required 3.5 percent down payment. There are no restrictions on property location, income, or previous ownership. Credit scores can be as low as 620. And no homebuyer classes are required. If your income is less than 115 percent of your area median income, the loan turns into a grant if you pay your first-mortgage payments on time. Abio Realtor Shannon Kelly's preferred lender, Pinnacle Capital, is one of the local mortgage advisors knowledgable about the Chenoa Fund.
- Cash-for-Equity - A handful of relatively new shared-equity lenders will help fund your down payment in exchange for a stake in your house. San Francisco-based Unison, for example, will provide up to half of your down payment funds. It’s an investment, not a loan. When you sell, Unison will share in the changing value of your property. If the home value increases, Unison takes a portion of the gain, and if the value decreases, Unison takes part of the loss. To qualify, borrowers need good credit, qualify for a standard mortgage, and afford at least a 10 percent down payment. The catch: If the homeowners haven't sold property after 30 years, they're obligated to get an appraisal and cash Unison out. OWN, based in San Marcos, is another start-up in this market.
Pledged Asset Program
Some brokerages allow borrowers to leverage their stocks, bonds, and mutual funds to buy a home. Our resident expert, Abio Properties Realtor Vikki Bearman, bought four homes this way.
“Why is this a phenomenal way to borrow? It is phenomenal because we have so many people in our area who are holding a lot of stocks,” she says.
How it works: Borrowers pledge a large portion of their assets (barring 401k and IRAs) as collateral to a lender. (Vikki has worked with Merrill Lynch senior financial advisor Dan Lowe). For the privilege of warehousing your assets, the lender gives you 100 percent financing. As long as the stock market holds up, your assets will continue to grow under this umbrella, and so will your new home asset. The lender will release your pledge account once the mortgage is paid down to an amount set by your lender (around 70-80 percent in many cases). If your assets earned excess capital during that time, that’s yours, too. This is a bull-market strategy.
The risk: Stocks could tank (see the Feb. 5 stock market plunge), and you might need to add additional securities to the account, or the lender can sell the account and pay down the loan to protect what would have been your down payment.
Parents also can pledge assets to help their children buy a home (up to 100 percent financing). They maintain control of their securities and don’t have to worry about gift tax implications. This is a great way to help kids get into their first home.
Physician Mortgage Loan
New doctors, dentists, and even veterinarians have plenty of earning potential, but they often start their careers with little savings and heavy student loan debt. Physician mortgage lenders bank on the borrower’s income potential and relax certain conventional loan requirements, like having a low debt-to-income ratio.
This program requires little or no money down and doesn't require the borrower to buy private mortgage insurance. Medical residents, licensed medical doctors, optometrists, osteopaths, opthamologists, podiatrists, dentists, and veterinarians all qualify -- usually if they graduated within the past three years. Most of these loans are capped at $1 million, according to Realtor.com. Proof of employment or a contract for future employment and a credit score of at least 680 are required. Find a loan officer who specializes in physician mortgages here.
Most members of the active military, veterans, reservists and National Guard and surviving spouses are eligible to apply for loans backed by the U.S. Department of Veterans Affairs. Qualified borrowers can receive 100 percent financing. No private mortgage insurance is required. Credit score requirements are lower than conventional loans. And VA loans aren’t restricted to first-time buyers. The current maximum guaranty is capped at $679,650 in the Bay Area, but that could change. Also, with a little down, there is no loan limit.
“It’s absolutely the best loan on the planet,” says John McDade, a nationally-recognized Veterans Affairs lending specialist at Perl Mortgage, who has connected with past clients of Abio agent Vikki.
Vikki, who came to real estate after a career in lending, is an enthusiastic fan of the program, which unfortunately is underutilized. “Every single time I meet with a buyer, the first question I ask them is ‘Are you a veteran?’” Vikki says.
Because of old problems and current misconceptions, only 10 percent of people who are eligible for a VA loan use it, according to John. Although the VA loan process was once criticized as difficult and slow, the VA has streamlined and improved the program, and more upgrades are coming, he says.
Vikki has seen the power of VA loans first hand. Around 2013, she worked with the first same-sex married couple to qualify for this VA benefit, which previously was denied to couples like them because same-sex marriage was not legally recognized. The couple’s home buying success in Concord was emotional for everyone involved.
“There was not a dry eye in the house” on the day they finalized the sale, Vikki remembers.
For a list of other VA Loan lenders, check out Nerdwallet's recent list here.
Read related: Qualify for a Mortgage in 6 Simple Steps
Did you get creative with your financing? Tell us how you did it! Contact Abio Properties at 888.400.ABIO (2246) or firstname.lastname@example.org. We can share additional creative financing resources and a list of preferred lenders.