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| Assistance Program Breaks Down Barriers to Homeownership |
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Since 1996 the Nebraska Investment Finance Authority (NIFA) has provided more than $10 million in internally funded, no-interest loans to help the state's first-time homebuyers make a downpayment on or pay closing costs for the home of their dreams. More than 4,000 loans have been processed through the Home Buyers Assistance (HBA) program, according to Jacki Young, manager of the authority's Single Family Home Program. NIFA established HBA to address the often-insurmountable obstacles it believed were keeping low- and moderate-income families from buying their first homes. These families have steady incomes and good credit ratings, says Young. However, they generally lack the upfront cash necessary to close their real estate deals, and they have no family members who can provide those funds as a gift. Before NIFA established HBA, some borrowers were not able to qualify for loans due to insufficient funds to close the transaction, says Young. HBA provides low- and moderate-income homebuyers with everything they need to complete a real estate deal. Qualified borrowers receive a low-interest, 30-year first mortgage through NIFA's Single Family Home Program to cover the cost of their home's purchase price. They also execute an interest-free second mortgage, financed solely by NIFA's HBA, that helps pay upfront costs. The second, soft mortgage, uses no federal or state tax money, requires no monthly payments from the borrowers, and is forgiven over 11 years. HBA products currently make up 50 percent of all the mortgages NIFA makes to the state's first-time homebuyers. "NIFA relies upon participating lenders to qualify borrowers based upon specific underwriting guidelines," says Young. "Conceivably, the borrower could go back and reapply for a loan once sufficient funds have been saved. Depending upon how much time has passed, certain factors could change—for example, interest rates could go up or the borrower's financial position may change, which would preclude them from qualifying for the loan." Young says few resources are available in Nebraska to help first-time homebuyers with downpayment and closing costs. Communities have the opportunity to apply for state or federal grant funds to assist homebuyers. However, these funds are limited and are available only within communities that receive the grants. The HBA program is available statewide through NIFA's network of lenders, says Young. Loan or gift? HBA borrowers must meet the same income and purchase-price limits that apply to all NIFA borrowers. However, they pay a slightly higher interest rate for their first mortgage than NIFA borrowers who do not receive extra assistance (currently 7.28 percent for the HBA first mortgage as opposed to 6.45 percent for a regular NIFA mortgage). The higher rate helps NIFA offset the cost of the second mortgage, which is set at an amount equal to 4.25 percent of the first mortgage. Buyers must contribute a minimum of $500 of their own money to cover downpayment or closing costs. No monthly payments. Without exception, HBA borrowers are relieved to find out they won't have to make payments each month on the second mortgage. While borrowers' cash flow concerns were considered when designing the program, Young says that the no-payment feature also gives NIFA lenders more leeway when underwriting a borrower's first mortgage. Because lenders don't need to include the HBA liability when calculating the borrower's debt ratio, they can approve a higher loan amount than they would for a borrower who had additional monthly obligations. "If borrowers were required to make monthly payments to pay off the second mortgage, this could affect their debt ratio and in some situations disqualify them from buying a home," says Young. "The HBA second mortgage is a loan, but it is also a gift, so it does not affect how much of a house borrowers can afford." Forgiveness. HBA borrowers repay their second mortgage only if they sell their homes or refinance their first mortgage before the end of 11 years. NIFA's declining repayment scale ensures that borrowers will repay the full amount of the second mortgage only if they sell or refinance the first mortgage during the first 3 years. Borrowers can satisfy the second mortgage by repaying 75 percent in years 4 to 6, 50 percent in years 7 to 9, and 25 percent in years 10 and 11. In year 12, there is no repayment obligation. "We think this is a phenomenal benefit," says Young. "There are some programs out there that don't have that forgiveness period. Sure, borrowers are paying a slightly higher interest rate on the first mortgage as compared with our regular program, but the difference is not so much that it impacts the borrower's monthly payment." Self-funding. The HBA program has never used any federal or state tax money to fund its operations or its mortgages. During its first 2 years of operation, NIFA funded the program out of its own operating budget. In 1998, convinced that the program was "here to stay," the authority decided to issue low-cost general obligation bonds to finance the program, says Young. HUD, USDA, and the U.S. Veterans Administration either insure or guarantee all first mortgages issued through NIFA. However, no government agency insures the HBA second mortgage. NIFA assumes all risk and loss on the second mortgage. "If the loan goes into default and foreclosure proceedings are initiated, our second position would be extinguished," says Young. "Our exposure on the second mortgage declines the longer the loan remains outstanding."
"It has sold itself," she says about the program. "There's no question now that one of the biggest barriers to first-time homeownership is downpayment and closing costs. There is no doubt that we have helped people buy a home who would not have been able to buy it without this program. There is a great need for this kind of program, not only in Nebraska, but everywhere." For more information, contact: Jacki Young, Manager of NIFA's Single Family Home Program, at (402) 434-3900.
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