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DC has a program to help first-timers buy a house, and it may start giving more aid

DC has a program for helping people buy houses, but the money it awards doesn't line up with how much houses in the city actually cost. The program might start awarding more money soon.


Photo by C.E. Kent on Flickr.

Programs to support first-time home buyers help spur economic security and neighborhood stability across the US. In Washington, the Home Purchase Assistance Program has been the key tool for the District to support first-time homebuyers.

On January 7th, the DC Council held a hearing to consider raising the maximum amount applicants can receive, from $50,000 to $80,000.


The proposed increase in loan amount would increase HPAP buyers' purchase power and give them access to more homes on the market. The figures below are based on 38% front end ratio (the proportion of monthy income that would go to the full cost of the mortgage) and a 5.5% interest rate, so maximum purchase prices could be higher. Tables from the Housing Advocacy Team.

HPAP helps people jump one of home buying's biggest hurdles

When someone buys a house, they take out a regular mortgage loan from a traditional bank for the bulk of the home price. HPAP augments that money by providing what's known as a "second trust loan." HPAP money can also go toward a down payment, and the program offers an additional $4,000 to help with closing costs.

The actual amount that the borrower is eligible for is based on their income, with lower income households eligible for more assistance. Those receiving the highest loan amounts make 50% of the area median income or less. Participating owners receive both pre- and post-homebuyer education, and they pay back the second trust loan with zero interest starting in the fifth year of their mortgage.

Saving for a down payment is often the greatest barrier to owning a home. Many people already pay high monthly costs in rent and could afford the monthly cost of a mortgage and upkeep, but cannot also save tens of thousands of dollars towards a downpayment. In fact, according to the real estate website Trulia, it is 27% cheaper to buy in DC than it is to rent. Having a significant downpayment also lowers interest rates and monthly mortgage costs for the length of the loan.

A greater award amount would help buyers in a tougher market

Over the last decade, the maximum amount of money that HPAP awards a buyer has fluctuated greatly. That variation hasn't been based on housing prices, but rather DC's budget and spending pressures.

In 2008, the award amount was capped at $70,000. But when the recession hit, federal and local resources shrank, and the award amount dipped to $40,000 per purchase. While that rose to $50,000 in 2014, that jump paled in comparison to the rapid increase in the cost of buying a home here.

With HPAP's limits being what they currently are, most low-to-moderate income buyers could only afford homes under $300,000. According to Zillow, the median home price in DC right now is $502,600, and on average, between 2012 and 2014 there was 4.7 percent reduction in the number of condos and homes affordable to most HPAP borrowers.

MANNA, a nonprofit that has helped DC residents purchase homes for decades, crunched some of the numbers and put them into to charts:


As purchase prices have increased, the number of houses at prices affordable to HPAP buyers has dropped.

Should the DC Council increase HPAP's maximum award amount, houses in the $300,000-$400,000 range would be available to a lot more prospective buyers.

Thursday's hearing demonstrated wide interest in changing the award amount. Housing and Community Development Committee Chair Anita Bonds chaired the hearing and was joined by Councilmembers Nadeau and Silverman. All of the public testimony supported the increase, and Polly Donaldson, the Director of the Department of Housing and Community Development, which manages the program, expressed interest in increasing the award amount.

Elizabeth Falcon is the campaign organizer for the Coalition for Nonprofit Housing and Economic Development (CNHED), an association of affordable housing developers, community organizations, government agencies and more in DC. She writes about how policies affect affordable housing at the Housing For All blog. 

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No! Government should not make it easier for low income households to purchase homes they can't afford. Have we learned no lesson from the sub-prime bust? Putting low-income people on the hook for an $80,000 downpayment is not helping them in the long run. In 5 years when the downpayment loan comes due, a household still making $42,800 or as much as $50,000 will not most likely be unable to pay for a $248,255 house.

by Kevins on Jan 14, 2016 1:39 pm • linkreport

So the government is paying out money for houses that people can't afford because that same government somehow is incapable of zoning such that there is affordable housing...

That is such a typical governmental reaction. There is a prolem. Quick, let's throw money at it! And then ignore the cause of the problem.

Sigh.

by Jasper on Jan 14, 2016 1:40 pm • linkreport

*downpayment loan *payments* become due...

by Kevins on Jan 14, 2016 1:42 pm • linkreport

Awful, awful idea and considering the Post did an article on HPAP in 2012 that illustrated the "fail" with the program, I am surprised with the desire to throw more good money after bad.

"Nearly one in five buyers participating in the city’s 35-year-old loan program for first-time homeowners is behind on mortgage payments, city officials said — a default rate that’s at least THREE TIMES HIGHER than the overall rate in the region. Nearly 50 buyers have received notices of foreclosure in recent years, while more than 50 others have struggled with homeowner association or utility liens, The Washington Post has found."

by Kelly on Jan 14, 2016 1:50 pm • linkreport

Let people borrow more cash to buy homes? The easier we make it to borrow, the more people will borrow and the more difficulty they will have paying back bigger loans.

Rather than increase the pool of potential buyers, by lending more $$. which helps increase the market price of homes, we should do more to increase the number of available homes by making it easier to build them.

by turtleshell on Jan 14, 2016 2:17 pm • linkreport

I think increasing home ownership for lower middle class to middle class folks is a laudable goal.

How are they going to afford maintenance, tho?

by h st ll on Jan 14, 2016 2:19 pm • linkreport

Under today's underwriting guidelines, HPAP underwriters calculate the total monthly debt which includes: repayment to HPAP in year 6, the mortgage, taxes, insurance, and other monthly debts. If that total monthly debt exceeds the qualifying ratio (43% of the applicant's monthly income of today's salary) then the contract is denied. 43% is industry standard and is a ratio most lenders use. Since 2012 nonprofits, lenders, and real estate agents that have clients working with HPAP have advocated for change in the program to ensure families are not placed in homes they cannot afford. That includes a more rigorous underwriting criteria to ensure new HPAP clients would still be able to afford the home in year six, once the HPAP repayments kick in.

by Orlando on Jan 14, 2016 2:29 pm • linkreport

This is great, end of the day not a big difference but good.

by BTA on Jan 14, 2016 2:46 pm • linkreport

The loan is forgiven over 5 years so it is not a burden on low income people. Lets be honest even middle income people can benefit from this when 2 bedroom condos cost $300-400k+

by BTA on Jan 14, 2016 2:59 pm • linkreport

The loan is forgiven over 5 years so it is not a burden on low income people.

Wait...what now?

by oboe on Jan 14, 2016 3:10 pm • linkreport

It's more of a "silent" loan as opposed to forgiven. Silent meaning no payments need to be made on the loan until after five years of closing date.
You're right, BTA, it's not making a huge dent but to address affordable housing, we need a wide variety of solutions and not just one.

by Orlando on Jan 14, 2016 3:10 pm • linkreport

BTA, no. The loan is not forgiven. It is deferred for 5 years and then interest free. Once payments become due, the HPAP borrower is on the hook for the downpayment loan + mortgage loan + taxes, insurance, etc.

by Kevins on Jan 14, 2016 3:35 pm • linkreport

An exercise in tail-chasing. As government subsidizes the ability to buy something, demand increases, and prices increase, putting frustrated would-be buyers in the same situation while wasting public funds.

The DC government has a very simple tool at its disposal to lower the cost of housing: land use law reform. It has consistently refused to use that tool. This is a government-created housing crisis.

by Hadur on Jan 14, 2016 3:43 pm • linkreport

Kevins (and others) - I think you all missed the sentence "Many people already pay high monthly costs in rent and could afford the monthly cost of a mortgage and upkeep, but cannot also save tens of thousands of dollars towards a downpayment."

This assistance is meant to help with the down-payment necessary to start up the mortgage, for lower-income people who are unable to save the many tens of thousands of dollars required to buy a home, but who can (and do) manage to pay rents that are equal to mortgage payments. Note that "lower-income" does not equal "poor" - it often just means "people with incomes that adequately cover their monthly living expenses but leave nothing left over to build up savings or wealth." Lots of people fall into this boat, including people with college degrees and well-paying jobs... and including several of my friends who graduated with student loans that sapped their ability to build up their savings.

There's no real difference between this program and, say, a kid who graduated from college and gets money from his/her parents to use for the down-payment on his/her first home, on the condition that he/she pay the rest of the housing expenses (mortgage and upkeep) on his/her own... except that this program is open to everyone rather than the lucky few who won the birth lottery. Why should the inability of some DC residents to be born to generous and wealthy parents mean that they are permanently locked out of ever owning a home in DC, just because they never are able to scrape together the down-payment funds?

I didn't realize that people in the DC region were so Victorian in their thinking, believing that people should know their place and always stay there.

by Patrick on Jan 14, 2016 3:52 pm • linkreport

Patrick, I'm not missing anything. There's a big difference between paying monthly rent (which DC already subsidizes for a household earning $42,800) and being indebted for $248,255 with a strong chance of defaulting and having a credit score too low to buy or rent anything in the future. For a couple earning $42,800 it's no doubt cheaper and less risky to rent.

by Kevins on Jan 14, 2016 4:19 pm • linkreport

The whole point is that the mortgage is comparable to or even less than rent, but that because of tight household budgets it's hard to save enough for the one-time large down payment.

These are buyers who are already capable - today! - of paying the mortgage; it's that initial tens of thousands that put it out of reach.

by Low Headways on Jan 14, 2016 4:36 pm • linkreport

@BTA, that's DC Open Doors, not HPAP. From what I've heard from those on the ground with real estate, HPAP has been an abject failure, and I'm really kind of shocked that DC is expanding it. Sellers apparently refuse to take offers made with HPAP because it has really rigorous standards for home condition and the paperwork is a mess, and apparently takes forever. My agent was telling me that there were a lot of cases where HPAP buyers were the only offers on houses and sellers still refused.

Open Doors has worked much better. For those not familiar, it's a program that works with banks to fold a forgivable down payment into your loan. DC pays your down payment over 5 years (20% of the down payment is forgiven a year as long as that house remains your primary residence). You get a higher interest rate, but the hurdle of a down payment is eliminated. 3.5% FHA, 3% conventional.

I was looking into using it myself, but I wound up getting a dramatically better interest rate with a normal FHA loan (3.625 FHA v. 4.8% FHA w/DCOD), was able to stretch my cash to make the down payment. The rates are set by DC and are adjusted at set intervals, so sometimes they're out of whack with what the market should be.

by Zeus on Jan 14, 2016 5:10 pm • linkreport

I didn't realize that people in the DC region were so Victorian in their thinking, believing that people should know their place and always stay there.

Probably not the most compelling argument.

by oboe on Jan 14, 2016 5:12 pm • linkreport

Low Headways, mortgage payments on a $248,255 home + interest + property tax (possible HOA fee, utilities, etc) is nowhere near comparable to what a couple earning $42,800 would pay for subsidized rent in DC, for which they would qualify.

Countrywide would have said 8 years ago what you and many lenders are saying today.

by Kevins on Jan 14, 2016 5:43 pm • linkreport

The problems with this program sound administrative--too much paperwork that disturbs sellers and letting in buyers prone to default.

Yes, this will lead to price increases, but maybe prices increases are a good thing. Prices are still down compared from 08 in parts of the district and throughout the region. Housing is expensive to build--we have to subsidize supply or demand to get more people buying.

by Administrator on Jan 14, 2016 6:13 pm • linkreport

Oh, goody. Another 'problem' in DC? Just cut more checks, of course!

by Max on Jan 14, 2016 6:56 pm • linkreport

")There's no real difference between this program and, say, a kid who graduated from college and gets money from his/her parents to use for the down-payment on his/her first home"

Umm, there is a huge difference. If a family member gives another money and loses it, oh well. Their poor investment is the families problem.

In this program, the cost burden falls to the rest of us.

Why am I having to pay for someone who is ill equipped for homeownership to buy something they can't afford?

by Deke on Jan 14, 2016 7:08 pm • linkreport

These are buyers who are already capable - today! - of paying the mortgage

Then why are the default rates so high for these loans? I'd guess it's because of maintenance costs which are quite significant. That's probably why the program is so picky about only approving homes in tip top condition with no deferred maintenance.

by Falls Church on Jan 14, 2016 7:37 pm • linkreport

The problems with this program sound administrative--too much paperwork that disturbs sellers and letting in buyers prone to default.

The paperwork is necessary to ensure the homes aren't going to require too much maintenance and cause a default.

The buyers are prone to default because low down payments and low incomes are very correlated to high default rates.

by Falls Church on Jan 14, 2016 8:15 pm • linkreport

Loan requirements are becoming much more strict as of late, so I am not sure how many people this is really going to help when the scrutiny for mortgage applications has increased lately. While there were defaults for this, I think the number of people clearing this program is not likely to be very high in the future. You still have to get past the normal mortgage process even with the down payment assistance. Frankly this is not going to happen. Add to this a recent surge again of all cash buyers in DC, these folks are at a massive disadvantage compared to others in DC.

Let's be honest as well, these are buyers who need to find condos and coops, at least west of the river, that fill HUD requirements. HUD qualified HOAs are a rarity in DC. Many HOAs are not even bothering these days because the process is a bit of a bear.

With that being said even with the increases, house prices in much of DC are too high for this program. So it's likely being strangled in multiple directions.

by Meh on Jan 15, 2016 1:53 am • linkreport

Bunch of future foreclosures.

by asffa on Jan 15, 2016 8:04 am • linkreport

A well-managed program can work.

VA benefits include no down payment home loans. I haven't heard of that program going bust.

The problem with the subprime meltdown is applicants weren't vetted at all or very well, which helped inflate the housing market.

I'll assume that the DC program is only for people with a history of paying rents on-time, and decent credit.

This assistance program, however, should have clear metrics. If the default rate raises to a certain level, then DC should pull the plug, or change its standards.

by kob on Jan 15, 2016 8:25 am • linkreport

This is another example of the good=good heuristic, which good intentions don't always translate into good policy.

very positive intention -- getting around the barrier to saving up 50K for a down payment.

But a huge moral hazard problem as getting people with low incomes to buy houses also means higher defaults.

And as zeus has said in practice, may be too much paperwork and other lenders and sellers don't want to deal with it.

Conforming loans have been moved down to allow 5%, and there are FHA loans as well.

I'd suggest a re-think, and either go with a german model in a forced savings (tax your mortgage payments 1/12 each month) so that after a year you have a month of backup payments into an escrow account.

Or look at a larger way to rebate DC property and income tax payments for new homeowners.

What would be helpful here is actual better numbers on the HPAP program and how many people it actually helps.

by charlie on Jan 15, 2016 8:44 am • linkreport

@charlie What data do you have to support the assertion that getting people with low incomes to buy houses means defaults? That does not happen if they get into good mortgages and have good homebuyer education that prepares them for both purchasing and the costs of maintaining a home, as well as knowledge about what they should do as far as restructured mortgage payments if they lose a job (which all income levels in this country face).

I work for MANNA and we've sold homes for the past 30 years to over 700 lower-income homeowners with a 3% foreclosure rate - that's almost a third of the DC 8.5% foreclosure rate (see http://www.mannadc.org/wp-content/uploads/2015/06/The-Benefits-of-Homeownership-An-evaluation-of-Nonprofit-Development.pdf).

And there is plenty of data that lower income homeowners do just fine and thrive if they have the right knowledge and supports (see http://www.neighborworks.org/Homes-Finances/Homeownership/Survey-Results and http://hatdc.org/?p=1033).

And the financial crisis affected everyone, and was predominantly driven by subprime & risky loans by banks, refis and middle income homeowners (see http://hatdc.org/?p=653 and https://www.washingtonpost.com/business/what-caused-the-financial-crisis-the-big-lie-goes-viral/2011/10/31/gIQAXlSOqM_story.html).

I applaud the District for supporting a program like HPAP, which creates homeowners, tax payers, a program that brings money back to the District, allows low-to-moderate income folks to stay, contribute, and grow economically.

by Sarah Scruggs on Jan 15, 2016 10:33 am • linkreport

Sarah Scruggs, as Kelly pointed out, the HPAP program has a default rate that's 3 times higher, disproportionately affecting the very low and low income families.

HPAP works great for moderate income individuals who'd prefer to own an overpriced condo rather than rent an overpriced apartment. Those who make about or above the median household income ($61-84,100). Problem is these people don't need the help.

by Kevins on Jan 15, 2016 11:43 am • linkreport

Kevins-
"Problem is these people don't need the help."

This is not the case. They do need the help, if for no other reason than because developers would not meet their price range otherwise. While this upper middle group has have stong demand for housing, and are relatively elastic in terms of what they could buy, developers still refuse to meet their price points in favor of only serving the top 1%. Giving these upper middle income folks more acccess to the hosuing supply they can afford is a win win that would loosen supply somewhat down the line as well. It would also help relieve some excess demand in the rental market too.

by Peter L. on Jan 15, 2016 12:00 pm • linkreport

Peter L., helping more "moderate income" ($61-84,100, technically above average income) individuals to buy homes also increases the competition for prospective middle and lower income buyers, as it has already done.

I find no basis to conclude "moderate income" individuals can't afford housing in DC proper. I found 300+ listings under $300K. There are dozens of 1 BR condos under $100K.

These people can afford to rent the 500+ apartments currently listed under $2,000/mo while saving up 5-10% for downpayment. If they want to save up quicker, they can get a room mate.

by Kevins on Jan 15, 2016 12:33 pm • linkreport

@ Sarah Scruggs ; so you admit that without getting a "good" mortgage, "education" and help with restructuring in case of emergency/job loss lower incomes means more "defaults". And yes, I'm suing air quotes.

You are obviously more affiliated to "helping poor people". That's great. Just don't let that and your job blind you.

The problem is programs like this, while well intentioned, can get into problems on the details. And there me be other options (1% down fannie mae) that also get around the same problem.

For example, a useful addition here is a amendment that if the borrower does get into trouble with the primary mortgage, they foreclose and sell the property immediately the secondary loan is forgiven. Gets the property back into circulation.

by charlie on Jan 15, 2016 12:47 pm • linkreport

I know that some of you are basing your opinions about HPAP on the Washington Post’s 2012 article. However, some of the information in that article was misguided. The HPAP foreclosure rate has remained at 2% and a partial explanation for why defaults have been considered high is due to an administrative problem. The loan servicer was not informing buyers that it was time to begin making payments on their HPAP loans and others received mail from the servicer that didn't have HPAP on it and thought it was a scam. There have been numerous DHCD oversight hearings in which this issue has been discussed.

http://hatdc.org/?m=201206

http://hatdc.org/?p=678

In regard to the implementation and administration of the program, there are certainly issues with the program, but it’s far from being considered a failure. It has helped thousands of DC residents secure housing. Constant improvements are being made to the program, as long as we continue to have supportive government officials hearings like the one on the January 7th, I believe that the program will continue to become more effective

by Victoria on Jan 15, 2016 1:24 pm • linkreport

Victoria, those testimonies don't dispute any facts in the Post article. Pablo alleges Ameriprise reported him to the credit bureaus before payments were due. That doesn't speak to the low-income borrowers who defaulted because they did not have enough money to pay.

Also no bank will give a couple earning $42,855 a loan for a $248,255 home with $0 downpayment because the default risk is too high. By DC government providing an $80,000 loan for the downpayment, it only delays that high risk for 5 years.

by Kevins on Jan 15, 2016 1:58 pm • linkreport

And perhaps you all shouldn't let your bias against lower income homebuyers affect your thinking about this program and homeownership in general. First of all, you are reading the numbers wrong - a family at $42,855 wouldn't have a first trust mortgage of $248,255. $248,255 is the max purchase price - they would have a first trust mortgage of $168,255 and a zero interest HPAP loan of $80,000, which likely wouldn't be paid back until future resale. As with a homebuyer of any income level, having a good mortgage and the right knowledge and support is what makes anyone successful as a homeowner. HPAP buyers get that education and support, and if they come through MANNA, they definitely get that and are extremely successful homeowners. Just because you're lower income doesn't mean you can't qualify for a loan that you can afford to pay back.

And as far as the high HPAP default rates, as someone else mentioned, we know those are inflated because the Pablo example is not isolated...there are many HPAP buyers who have been marked delinquent when they were not, that didn't receive the archaic payment booklets from the servicer on time, that got mail from the servicer that didn't have HPAP mentioned anywhere on it and people were suspicious that it was a scam. And feel free to call the first trust lender that has been providing loans to about 75% of all HPAP borrower for the past 6-7 years (Primary Residential Mortgage). They don't have a larger default or foreclosure rate for their HPAP borrowers.

We all need to deal in facts about this program and current mortgage guidelines and the homeownership process in general before jumping to conclusions.

by Sarah Scruggs on Jan 15, 2016 10:35 pm • linkreport

The people on here is killing me, making these ignorant comments. I am currently looking/going threw the HPAP program. I work for the go government and still in the low income bracket And it is a good program. Do it have it faults. YES! But that don't mean low income people shouldn't get the chance to own there own homes. When we get help from the city (Section8, low income apt housing) it's a problem and now that we are trying to be home owners like everyone else's it's still a problem. I'm sorry that we aren't lucky enough to make 80,000.00-100,000.00. But it don't mean we can't afford to keep up with the mortgage.

by Michelle on Jan 19, 2016 7:44 am • linkreport

I smell fresh baked trollhouse cookies.

by The Truth™ on Jan 19, 2016 8:19 am • linkreport

Sarah Scruggs, there was no implication that the borrower took out a 248,255 mortgage. What must be understood is that the 80,000 loan does not vanish. Payments without interest commence in 5 years putting the borrower on the hook for $248,255 plus mortgage interest and annual taxes after 5 years.

So if the borrower can't afford a $248,255 mortgage today, what makes you think they can afford to make payments on $248,255+ in total loans after 5 years?

Michelle, everyone has the chance to purchase a home without HPAP. Getting interest-free downpayment loans may increase one's chances of getting a home, but not of keeping it after 5 years.

by Kevins on Jan 19, 2016 12:51 pm • linkreport

Kevins, the City Council and DHCD are looking at restructuring repayments for the highest loan amounts, meaning that the borrower wouldn't repay the loan until they sell in the future. So, it would essentially act as a lien on the property. And zero interest is different than a first trust mortgage with an interest rate. Another positive with a larger HPAP loan is that it will allow a lot of buyers to get a conventional loan which are much cheaper than an FHA loan which comes with a high mortgage insurance rate, sometimes saving people as much as $250 a month.

What is your proof that people en masse aren't keeping their homes and paying their first trust mortgage or their HPAP loan after the 5 year deferred period? HPAP serves people making up through $80,000 a year - are you saying that all borrowers are experiencing issues with repayment or just lower income borrowers, and how do you know? What numbers are you looking at? And how are the HPAP numbers different from the larger picture of the mortgage industry and homeownership over the past 10 years or so? Do you see no impact from tightened mortgage regulations on home buying in general and HPAP buyers in particular?

by Sarah Scruggs on Jan 19, 2016 1:21 pm • linkreport

Kevins, have you done the math on what the payments would be, and determined if that meets the typical qualifying ratios first trust lenders use in underwriting their mortgages? See below how it works:

1) Sales price = $248,255;
2) Qualifying ratio (let's use Fannie Mae as a guideline and assume buyer has decent credit score of 700) = housing debt (PITI) must not exceed 38% of gross monthly income;
3) Bank loan amount = $168,255 @5% over 30 years where payments equal $903.23 p/mo;
4) Property taxes (using DC tax rate and calculating tax based on sales price as an assumption for this case) = $175.85 p/mo;
5) Insurance (national average and about what I pay for a 3 bedroom home) = $80.00 p/mo;
6) HPAP loan amount = $80,000 @0% over 40 years where payments equal $166.67 p/mo (this is assuming all $80K is paid back and there are no "forgiven" portions to the loan);

So: $903.23 + $175.85 + $80 + $166.67 = $1,325.74.

If we work backwards and figure $1,325.74 is 38% of a monthly income, we find that the monthly income is $3,488.80 or $41,865.57 per year.

So Kevins, in your line of work as an underwriter for a mortgage company, does this family meet the required guidelines set forth by Fannie Mae, the same entity that purchases loans on the secondary market?

Lenders are most likely going to sell their mortgages on the secondary market, whether it be a $200K or $2.1MM mortgage and it may be Fannie Mae. Since the financial crisis, congress passed Dodd-Frank Reform and Consumer Protection Act. In this act, we find Title XIV - Mortgage Reform and Anti-Predatory Lending Act. A set of laws governing how lenders originate/sell/service mortgages making it stricter on securing a mortgage. It has become harder to obtain a mortgage than in 2012. So going back to our scenario, above, the lender is already calculating as if the borrower will be making payments on HPAP loan with their current salary. And we find that the buyer is well within the qualifying ratios.

by Orlando on Jan 19, 2016 1:41 pm • linkreport

Yes, Orlando but your calculations excluded big things like income and payroll taxes. Once considered, the borrowers (a couple making 42,855 annually) would have a NET monthly pay of only $2,534.

So mortgage payment would be closer to 52% of net pay. While feasible, it's tough. That's why the default rate is so high.

by Kevins on Jan 19, 2016 2:56 pm • linkreport

*So loan payments+tax+insurance (after 5 years) would be closer to 52% of net pay.

by Kevins on Jan 19, 2016 3:00 pm • linkreport

Kevins: Then you perhaps are recommending a change in the first trust lender's policy and not just the city's. The city is basing their underwriting guidelines on what first trust lenders do. And most first trust lenders do gross pay, not net. Although, even Fannie Mae will approve a loan going up to 50% if there are other compensating factors like: excellent credit, extended job history, excellent rental history and not a significant (defined by lender) payment shock, and assets like 401Ks.

I truly believe there are many more variables that cause a family to default, and it's not just high DTI ratios. The HPAP program has required all of their buyers to take eight hour pre-homeownership courses. My organization (Habitat for Humanity) requires buyers to take 22 hours worth of financial literacy, including estate planning and how to shop for life-insurance policies.

It doesn't matter what income level you are in, if you don't know how to manage your money and debt, then you may run risk into default. The HPAP program has gotten tougher over the years. The program's intent is to create opportunities for families and individuals who cannot finance 95% loan-to-value (FHA loan) to purchase. The intent behind the program's underwriting criteria is to maintain those homeowners as homeowners in year 6 and beyond. And part of that criteria is requiring the buyers to take financial literacy workshops.

I'm not disputing the fact that there will be some families or individuals who will default. I know families making six figures and they have defaulted on their conventional loans. Things come up. But what is great about the HPAP program is that they are teach buyers on how to mitigate those events that may put them in a financially difficult situation and they are looking to improve that front end and preparing buyers to become longtime homeowners. I believe it was mentioned earlier that AmeriNational, the mortgage service provider for HPAP loans, is responsible for communicating to the borrower when payments are to commence. Perhaps the timing of that can be adjusted to notify borrowers earlier.

But you're right, my calculations do exclude those items because Fannie Mae does too. If you advocate for first trust lenders to change their policies, this might not be the best forum to do so. You might have better luck on the hill. If you're writing a policy that uses net pay, there could be so many work-arounds a buyer can do to adjust their income to make the loan work for them. For example: you can change your 401(k) contribution or just opt-out, you can opt out of employee contribution to a health/dental plan or pension, or choose to withhold fewer taxes upfront and chose to pay more when you file. By doing these things, the buyer adjusts their net income used to calculate their affordability disregarding the thing you are arguing for: factoring in withholding.

The IRS married withholding rates for 2015 earning $43K is 15% and DC's is 8.95%. Where are you getting a combined withholding rate of 27% for a married couple earning $43K? If using a combined withholding rate of 24%, the borrower is at 50% of net, still within Fannie Mae's guidelines if borrower has other compensating factors.

by Orlando on Jan 19, 2016 4:12 pm • linkreport

Orlando, lenders/underwriters policies are not germane. When the bill comes, it matters not what one's gross pay is.

I also suggest using a take home pay calculator, like ADP's http://www.adp.com/tools-and-resources/calculators-and-tools/payroll-calculators/salary-paycheck-calculator.aspx for married filing jointly that factors in federal withholding and DC income tax, but also FICA taxes which seem to be left out again.

Putting 52% of one's take home pay towards housing payments is not itself unfeasible or bad, but for a couple making $42,855, it is difficult and subjects them to a high default risk. More difficult and risky than a couple making $250,000 and paying 52% towards housing.

by Kevins on Jan 19, 2016 4:56 pm • linkreport

Kevins: I'm going to repeat what I mentioned earlier.

"Then you perhaps are recommending a change in the first trust lender's policy and not just the city's. The city is basing their underwriting guidelines on what first trust lenders do. And most first trust lenders do gross pay, not net. Although, even Fannie Mae will approve a loan going up to 50% if there are other compensating factors like: excellent credit, extended job history, excellent rental history and not a significant (defined by lender) payment shock, and assets like 401Ks."

"But you're right, my calculations do exclude those items because Fannie Mae does too. If you advocate for first trust lenders to change their policies, this might not be the best forum to do so. You might have better luck on the hill."

Thanks and have a great week.

by Orlando on Jan 19, 2016 6:01 pm • linkreport

This 2nd trust will certainly not be a burden on the buyers as most downpayment assistance recipients do not need to pay back the amount unless they sell the home and/or pay it off. Also many of these downpayment assistance grants are actually forgivable after 5 years.

by Sherman Hardy on Jan 19, 2016 9:50 pm • linkreport

Patrick and Sara, thank you for your wonderful comments. I myself received assistance from the HPAP program to purchase the home I live in today. I am a Federal Government employee, twenty years ago my salary was very low but the HPAP program assistance provided me with $15,000.00 down payment on my home at zero percent interest that I was able to pay off several years ago. I have made my mortgage payments on time and the mortgage on my home will soon be paid off within the next 3 years. I am very thankful for HPAP as it afforded me the opportunity to be a home owner. There are many who have received assistance from HPAP to purchase a home and have not defaulted on the loan. There are thousands of citizens like myself that go to work every day and are productive citizens but due to the high cost of housing in the District cannot afford to buy. Remember people there are thousands of people who go to work everyday and yes they are not making large salaries of 80,000.00, 90,000.00 or 100,000.00 a year but that should not mean that they should not have the opportunity of others to be home owners. Yes, HPAP is a great program and yes it may have it's faults but it is a program that is needed for the low and moderate income citizens of DC. So Sara thank you and your colleagues for being an advocate and a voice for the lower income citizens of the District of Columbia.

by Sharon Sims on Jan 21, 2016 4:16 pm • linkreport

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