Can You Beat the Government?by Hassan Nicholás
No, I am not talking about hidden tax secrets, overseas bank accounts or anything illegal for that matter. What I am actually inferring to are government-backed subsidy programs; such as the ones promoted by the California Housing Finance Agency (CalHFA) and the Los Angeles Housing Department (LAHD). An article on Money.MSN.com by Liz Pulliam Weston listed "Not looking for first-time home buyers' programs" as #2 on her list of "8 big mortgage mistakes and how to avoid them" feature. And she's right. It is a good idea to look into government-sponsored loans, but they might not always have the best deal.We've seen a lot of people coming through our doors migrating towards these subsidized products. And I admit, its an aspect of our program that we emphasize greatly. Many lenders will announce that state, county and city programs is really the best deal one can get as a first-time homebuyer. For many this is true, but there's always an exception. Case in point. Government-backed subsidy programs (we'll refer to them as GSPs for the remainder of this article) alleviate the burdens that credit-strapped first-time homebuyers face when buying a home by offering deferred junior loans, below market interest rates, and in some cases forgiveable interest. Depending on the program and income eligibility of the household, this can amount to a generous helping of government assistance to the borrower - essentially allowing you to "buy more home" then what you would qualify for on income alone. Knee-deep in a failing real estate market with the word "recession" looming somewhere over the horizon, the popularity of GSPs has gained momentum and this Best Kept Secret is no longer. By now we all know its no secret that predatory, not necessarily subprime lending (yes, there is a difference), is what helped bring us to our current situation. It is then no suprise that buyers look to GSPs as a safe alternative while keeping an untrustworthy eye on traditional lenders. And with all the news coverage of lenders and realtors going under or getting bailed out for their wrecklessness (see Countrywide) it's understandable that many first-timers would seek refuge in the government. But by shying away from a traditional mortgage product are you narrowing your options? Don't get me wrong, GSPs are great. But like in every decision, especially this one, you should do your due diligence and make sure it is the right decision for you. Here are some caveats that you should know:- The interest rate is set. Yes, all GSPs have fixed interest rates, which is nice. What I mean here is that the interest is set; meaning regardless if a borrower has a 620 FICO or 700 they will get the same interest rate.
- But the interest rate can change. Here's something the State might not want you to know. When the demand is too high, they will artificially raise the rate. When that demand has subsided, rates will fall again.
- Funds can and do run out. Buying a home in general is an intimidating, nerve-racking experience. Imagine, being in escrow and finding out from your lender that the City of LA has ran out of funds. Now your home...and sanity is on the line.
- Restrictions. GSP is an income qualifying alternative that carries with it other requirements that must be met in order to be utilized. By trying to fit those guidelines a borrower might be compromising something they really want for the sake of getting what they appear to be a "good deal". For instance, short sales and foreclosed properties would not be eligible because they do not require home inspections. Additionally, there are other limitations, such as a cap on the maximum purchase price of a home that you can buy. That's why it is best to take a homeowner education workshop to learn the nuts and bolts of these programs before you apply.
- They Take Longer. Escrow periods when using down payment assistance programs can take up to 15 days longer then normal escrow, for a total of 45 days.
Can you beat the government then? Sure. While lending practices have turned more strict, the news is not so bleek for the borrower with an excellent credit score - which brings us to #5 on the list from the aforementioned article, "Not shopping around for rates and terms". If your FICO lands in the 700s you can probably find a rate better than anything GSPs are offering currently. What's cool is that the state lists all going interest rates for its programs. So now you can get a head start on your loan shopping (just remember interest rate does not equal APR!). And what about the City of LA programs and State programs for teachers that offer up to zero percent interest? The only thing that beats that is a grant...and we can give up on that fairytale in this market. Even if you could beat interest rates currently offered by GSPs with your stellar credit rating you are still giving up a deferred payment of up to 30 years. However, if your FICO is not as competitive going the GSP route could save you a lot of money and "buy" you the security that your mortgage won't turn on you in three or five years (ARM perhaps?).
Both government and private-sector loans offer many benefits. Before you finalize your financing, do all the math.
If I recall it was then president of Def Jam Sean Carter who said, "Men lie, women lie, numbers don't."
