There are myriad programs and creative financing options that can pave the way to owning a home if you know who to ask and prepare ahead.
As we prepare for the 2024 spring market, real estate agents and their clients are having in-depth discussions about what they can afford and how to secure their financing. But many wannabe buyers are dissuaded from believing homeownership is in the cards because they don’t have a big down payment, need to sell an existing home first, or are retired, among other hurdles. But with guidance from a savvy lender, the doors to homeownership start to open up.
Brian Bonnet and Carey Meushaw of Atlantic Coast Mortgage recently held a class for McEnearney agents to review financing programs and products for buyers eager to purchase but who need a little extra help putting their financing together. They reviewed common buyer challenges and the solutions available through ACM’s lending programs and those offered by housing agencies like Virginia Housing, Maryland’s Community Development Agency, and DC’s Open Doors.
Scenario 1: First-time purchaser with little available cash
Agents shared that many buyers are waiting on the sidelines because of concerns of not having a 20% down payment. In reality, Meushaw explained that there are many lower down payment options, even for conventional loans.For Fannie Mae and Freddie Mac, who provide guidelines for the vast majority of loans originated nationwide, the minimum down payment is only 3% for first-time homebuyers (which applies even if you’ve owned a home before but not in the last three years) and for higher-priced loans of $766,550-$1,149,825 the minimum down payment is only 5%. There are even lower down payment programs, such as those provided by VH, which are income-dependent programs with 0-3% down payments. VHDA provides both conventional first mortgages up to 97% and grants that can be used toward down payments.
In one example Bonnet shared, a qualified buyer using the Virginia Housing (VH) Plus program could purchase a $300,000 condo with a first mortgage of $291,000 and a second mortgage of $13,500 for total financing of $304,500. That means the buyer can finance $4,500 of the total closing costs, leaving them with a cash requirement of roughly $8,200.
In another example, for a $500,000 townhouse with a first mortgage of $485,000 and a second mortgage of $22,500, the borrower’s cash needed is approximately $7,900. In both scenarios, buyers do need cash funds, but as seen in these examples, the amount required was less than $10,000, much lower than many buyers expect they’ll need.
Scenario 2: Home to sell and can’t compete with a Home Sale Contingency
In a competitive market, a home sale contingency is generally a non-starter for sellers who want “clean” contracts with few or zero contingencies, but agents know that potential seller-buyers want to avoid selling their existing home before they have their next home to move to. Stalemate, right?Not always, says Bonnet. “I have active customers who thought they couldn’t purchase before first selling because they needed the cash equity from their existing home, and they cannot qualify for the new traditional loan without getting rid of the existing home loan,” he shared as he explained how they worked out a plan using a bridge loan.
There are two types of bridge loans that Atlantic Coast Mortgage offers: a cash-out bridge loan and a purchase bridge loan. In the first, owners can refinance their current home to allow for a line of credit that can be used for a down payment or closing costs on a new home and must be repaid within three months.
“We have qualified them for a bridge loan on their existing home without consideration of their debt service on the next home,” Bonnet explained. With that bridge loan, they convert equity to cash to be used as a down payment on the next $1.1M home.”
Bonnet continued, “Because they don’t qualify for a traditional loan on the next home while carrying the debt on the existing home, we have also qualified them for a bridge loan on the new home without consideration of the debt on the existing home. With this unique Atlantic Coast Mortgage underwriting guideline, the seller-buyers are now able to write a contract that is not contingent on the sale of their existing home, and, if they choose, they can waive financing and appraisal contingencies and be in the hunt as competitive prospective homebuyers.”
Scenario 3: Retirees and self-employed buyers without steady incomes
There are other ways a smart lender can set clients up for success, even without a monthly income. Self-employed buyers will have many deductions that can reduce their net income (on paper), but with the right documentation, lenders can help them add back depreciation, thereby increasing their eligible qualifying income. Meushaw also ran through an example of a retiree who could begin drawing from their qualified retirement account penalty-free at 59 ½ years old. With a $1M retirement fund, the retiree could set up a distribution of $10,000/month that can be counted as immediate income that can be used for qualification purposes.Both Bonnet and Meushaw agreed that the more information a lender has, the better they can advise buyers, and advise buyers to get in contact with their financing expert as soon as possible. This gives buyers the opportunity to review with their lender which programs they might qualify for and what timelines they will be working under.
Don’t let a challenging market get in the way of your dream of homeownership. Work with an experienced McEnearney | Middleburg Real Estate | Atoka Properties agent and trusted lender to find the options and avenues you didn’t know were possible to get you on your way.
