Are Down Payment Assistance Programs Going Away in Colorado?

There have been a lot of rumors going on this past week about the loss of down payment assistance programs which would make the dream of homeownership for many people simply that…a dream!

 Contrary to some reports, the Housing bill being considered in Congress this week does NOT eliminate all downpayment assistance programs from eligibility for FHA insurance.  The legislation would only prohibit seller-funded downpayment assistance, or assistance from someone who financially benefits from the transaction.  Other forms of assistance – such as family members, government-sponsored programs, or gifts from non-profits would still be permitted.  The Housing bill also contains many reforms that are critical to housing markets, including FHA reform, GSE (Government Sponsored Enterprises) reform, a homebuyer tax credit, and permanent increases to the FHA and GSE loan limits.  This bill will help millions of American families avoid foreclosure and safely and affordably achieve the dream of homeownership.  

FHA is the only mortgage program that has allowed seller-funded downpayment assistance.  However, FHA’s recent default rate is troubling. Due to the current performance of its loans, FHA must receive a federal subsidy for the first time in its history, or raise premiums on borrowers in order to remain solvent.  This is primarily due to loans with seller-funded downpayment assistance, which have a default rate 3 times higher than other FHA loans.  Loans that receive downpayment assistance perform less well than loans without downpayment assistance.  A recent GAO study found that loans with seller-funded downpayment assistance experienced more than double the risk of delinquency than loans with other types of downpayment assistance, and almost three-times the risk of loans with no downpayment assistance.  (Additional Action Needed to Manage Risks of FHA-Insurance Loans with Downpayment Assistance, United States Government Accountability Office, November 2005.)  

Recent studies have demonstrated that seller-funded downpayment programs often result in inflated home prices.   These studies showed that homes sold using this type of downpayment assistance typically sold for 2-3% higher than comparable homes without downpayment assistance. (Seller-Funded Down-Payment Assistance Changes the Structure of the Purchase Transaction and Negatively Affects Loan Performance, United States Government Accountability Office, June 22, 2007.)  When a borrower takes out a mortgage on a home with an inflated price, not only are they at greater risk for foreclosure, but the resulting inflated price can have ramifications to the housing market in that community.  Home sales prices are used as comparables to determine the price of other homes. Inflated prices overstate the market demand and can lead to exaggerated home sales prices in the neighborhood.  This can magnify what housing affordability problems already exist in these communities.  In addition, inflated home prices impact the risk to the FHA fund by increasing the “severity of individual claims on the FHA Insurance Fund and FHA losses on claims paid on such mortgages.”(HUD Proposed Rule, “Standards for Mortgagor’s Investment in Mortgaged Property”, Federal Register, May 11, 2007, Page 27049.)  

The effective date for the prohibition of seller-funded downpayment assistance programs is October 1, 2008.  We hope that in the remaining months, Nehemiah and other such providers will be able to develop a business model that does not rely on seller-funded downpayment assistance, but instead will provide downpayment assistance that will help homeowners without putting them at risk for foreclosure.

This will dramatically affect many first time home buyers so if you are on the fence about buying a home and need payment assistnace then now could be your last, best opportunity to move off the fence and buy your dream home!

If you are in Northern Colorado and would like help finding your next home then email me: Mike@MikeMalvey.com and visit: www.SearchFortCollinsMLS.com.

And thank you readers for taking my blog to over 11,000 views!!!

Typical Closing Costs in Fort Collins, Colorado

I often get asked about the costs associated with a real estate transaction in Fort Collins so I thought I’d put together a sample of the various costs and the responsible party for each.

In Colorado, disbursements from closing may be made only after the closing entity has received “good funds.”  Good Funds are considered to be cash; electronically transferred funds; certified, cashier’s or teller’s checks; and other funds which are either received in sufficient time prior to closing to be eligible for immediate withdrawal or are guaranteed by the depository on which they are drawn.

There are several items that will be “prorated” which means to distribute or allocate shares of on-going income and expense items to the proper parties when the property changes ownership, according to the contract or governing law.  Prorations are generally required for property taxes, rents, on-going association assessments, property and mortgage insurance, interest on loans and for water and sewer.  These items may be paid in arrears or in advance.  If the payment is due at the end of the benefit period, it is paid in arrears, such as Colorado property taxes.  If the payment is required at the beginning of the period, it is made in advance, e.g., property insurance or monthly rent.

In the Commission approved Colorado contract forms, the BUYER owns the property all day on the day of closing.  Proration results in credits and debits for both buyer and seller.

A credit for the seller increases the amount that he is entitled to receive whereas a credit for the buyer decreases the amount that she must pay.

A debit for the seller decreases the amount that he is entitled to receive whereas a debit for the buyer increases the amount that she must pay. The major credit for the seller is the sales price of the property, which is also the major debit for the buyer. The other credits and debits modify the amount of money that the buyer actually pays to the seller at closing.

 At closing, there are expenses that either the buyer or seller is wholly liable for and is expected to pay. Most of these costs are closing costs, which pay for closing itself rather than for the property or bills associated with the property. Some of these expenses include the following:

• Buyer usually, if applicable, pays for:
  • Loan costs
    • origination fee
    • discount points
    • appraisal fee required by lender
    • credit report
    • lender’s inspection fee
    • mortgage insurance application fee
    • assumption fee
  • Other payments required by lender
    • mortgage insurance premiums
    • hazard insurance premiums
    • title insurance
    • survey fees
  • Government Recording and Transfer Charges
    • recording fees and releases
    • municipal taxes or stamps
    • state tax or stamps
  • Other Settlement Expenses, if applicable:
    • commission for buyer’s agent
    • buyer’s attorney fees
• Seller usually pays for:
  •  
    • broker’s commission
    • title search
    • prepayment penalties, if any
    • certificate of satisfaction fee

There is even more protection for the buyer through real estate laws.  The Real Estate Settlement Procedures Act was designed to inform the buyer of real estate about closing costs and to prevent abusive practices that inflate the costs of closing for the buyer.

This federal Act, administered by the Housing Urban and Development (HUD) agency, applies to any closing using first-lien federally related loans, which includes most mortgages, for residences, condominiums, and cooperatives consisting of 1 to 4 units.

It requires that the lender disclose the costs of the closing to the borrower and prohibits the lender from demanding excessive deposits for escrow accounts, which are accounts required by most lenders to pay for future real estate taxes and insurance premiums.

RESPA also prohibits referral fees, such as kickbacks, for directing the buyer to other services when no services are actually performed.

Some brokerages have a controlled business arrangement (CBA) that allows it to offer several related home-buying services, such as for title insurance, home inspections, and even moving. These business relationships must be disclosed. The brokerage may also offer computerized loan origination (CLO) services that allow a potential buyer to easily shop for a loan. However, RESPA requires that the broker inform the buyer that she can shop for those services elsewhere, and is not restricted to using only the settlement services provided by the CBA or the CLO.

RESPA has the following specific requirements:

• within 3 days of the loan application,
  • the borrower must receive a special HUD settlement cost information booklet that provides an explanation of closing and its costs;
  • the borrower must receive a good-faith estimate of the settlement costs;
• the buyer has a right to review a filled-in Uniform Settlement Statement (HUD-1 Form) at least 1 business day before closing.

The HUD-1 form itemizes all charges that are paid by either the buyer or the seller at closing. Items that were paid by either party outside of closing do not have to be listed. However, if the lender required that any charges be paid before closing, then these must be listed as paid outside of closing (POC).

If you have any questions about your particular closing costs, my suggestion is to contact your realtor immediately and they can get in touch with the title company or mortgage lender to get the problem resolved.

If you live in the Fort Collins or Northern Colorado area and have general questions then please feel free to contact me via email: Mike@MikeMalvey.com; via website: www.SearchFortCollinsMLS.com; or call my cell phone: 970-420-7235 and I’ll do my best to solve your problems.

Your feedback or comments are always appreciated.  And thank you for taking my blog to over 14,000 views!!