home financing for those in need
If you're looking for a mortgage,
the best place to start might be your state capital rather than
the local mortgage broker's office.
That's because little-known outfits called
finance agencies can often be found near governors' mansions.
These quasi-independent agencies offer special loan programs to
low- and moderate-income home buyers, buyers interested in helping
to rehabilitate urban areas and a host of other groups. For borrowers,
their mortgages can slash ownership costs considerably because they
feature below-market interest rates, closing-cost discounts and
other benefits that conventional loans simply can't match.
"We operate a number of different loan programs
for home buyers as well as provide other services to help meet the
needs of our respective states," says Mark Stalsworth, homeownership
manager with the Missouri Housing Development Commission. "We are
there to try to fill those gaps the private sector either can't
or isn't meeting and put enough money into the deal.
"Our goal is to get funds out and to help the
people who need them."
You can find a housing finance agency in your state
by contacting the National Council of State Housing Agencies at
202-624-7710 or visiting the NCSHA Web site at www.ncsha.org.
Housing finance agencies have been around for almost three decades
in some states. But because they operate behind the scenes, many
home buyers aren't aware of their existence. Their primary mission
is to boost homeownership among needy groups, including first-time
home buyers, urban shoppers and people with little money for down
Most are nonprofit companies originally financed
with state-government seed money that now operate independently.
They raise money for loans by selling tax-exempt bonds. Investors
in those bonds are willing to accept yields that aren't as high
as the ones on traditional mortgage-backed securities made up of
conventional home loans because the lack of taxes boosts their investment
return. That allows agencies, and the lenders who offer their programs,
to cut consumer loan costs.
"We issue bonds and basically, there are investors
out there purchasing those bonds," says Sherrie Simmonds, a spokeswoman
for the Alaska Housing Finance Corp. in Anchorage. "Anyone investing
in those does not have to pay taxes on the interest they earn.
"They are willing to take a lower interest rate
than what they might if they would have to pay taxes on that. And
since we're not having to pay as much to issue the bonds, we're
able to pass those savings on and charge a lower interest rate to
people who are getting the loans through us."
Traditionally, most agency programs have come
with fairly strict income and home-value limits. That's because
the federal government will only waive taxes on agency bonds if
the agencies agree to use the subsidies for social good. Yet in
recent years, the agencies have figured out ways to branch out using
excess money from tax-exempt bond sales and cash from the sale of
taxable bonds. They now offer all kinds of tailored loans that feature
less onerous borrower restrictions, giving many more people the
chance to save money.
"The agencies are maturing," says Phil Friday,
a spokesman for the Pennsylvania Housing Finance Agency in Harrisburg,
Pa. "Because they have the experience and they've done it a long
time, they're innovating.
"Also, necessity is the mother of invention.
You just can't issue enough bonds to meet the demand you have, so
agencies have developed relationships with the lenders that meet
their needs in particular states."
Special deals for special
What kinds of deals do agencies offer? In Philadelphia, a family
of four whose annual household income does not exceed $36,000 and
aren't buying existing homes worth more than $110,000 can get 30-year
loans for just 4.75 percent, one point and a $300 fee, plus normal
closing costs. A conventional one-point loan, on the other hand,
runs about 5.0 percent in the city, according to Bankrate.com data.
Borrowers who are a little well-off can get
discounted loans through the Statewide Homeownership Program. The
current regular Statewide rates run between 5.00 to 5.50 percent.
A family of four who earns up to $55,000 a year may purchase existing
homes worth up to $130,000. Borrowers do have to pay a one-point
origination fee, a $300 qualifying fee and other normal closing
costs to participate in the program.
"What they offer primarily are discounted interest rates compared
to the normal street rate on regular loans," says Richard Mahan, a
branch manager with Columbia National Inc. in Harrisburg, Pa. The
company is authorized to write Pennsylvania Housing loans. "In its
simplest form, that's what the program is all about."
The rates that agencies offer vary widely and
can be lower in some states than in others. If a state just issued
new bonds and market rates have fallen for several weeks, its rates
will often be lower than rates in a state where the most recent
bond sale took place before the market decline.
Poorer consumers and those who meet certain
state-specific criteria can get even lower rates. In Alaska, Simmonds
says certain buyers can qualify for multiple discounts and reduce
their rates. The state gives people extra help if they make very
little money, purchase energy-efficient homes or choose to live
in towns with less than 1,400 people who aren't connected to Anchorage
or Fairbanks by road or rail.
Remember the recapture
Borrowers need to watch out for the so-called "recapture tax" on
subsidized loans, however, because it can come back and bite people
whose incomes or home values rise substantially. Remember that the
government is happy to help needy buyers by forgoing the taxes it
would otherwise charge on agency bonds in order to lower consumer
At the same time, Uncle Sam doesn't want borrowers
benefiting from subsidies they don't need or who are using them
as a way to get rich. So on programs backed by tax-exempt bonds,
it has developed a way to recapture its subsidies, if necessary.
The rules are somewhat complicated. But generally
speaking, people have to pay the tax if their incomes rise more
than 5 percent a year and if they profit from their home sales after
subtracting real estate commissions, fix-up expenses and other assorted
costs. The tax usually amounts to a few hundred dollars.
There are plenty of exceptions, though. People
who own their homes for more than nine years don't pay the tax.
Consumers who make less than the program limit to begin with can
increase their incomes at a faster pace than 5 percent annually
without being subject to it. And no matter what, the tax will never
be more than 6.25 percent of the original loan amount.
But even with the tax drawbacks, agency loans
stack up well against conventional ones. That's why experts say
borrowers should be giving these increasingly innovative mortgages
a closer look.
"Because we're able to tailor loans to the
specific needs of the state and the local economy and to the needs
that might not be met by other types of loan options, that really
is where we're able to make a difference," says Simmonds.