How to Teach Homebuyers About Wealth Accumulation

Recently, we’ve been talking a lot about how homeownership is a very effective tool for wealth accumulation, particularly for low- to moderate-income borrowers. However, not every borrower has a clear understanding of what it means to accumulate wealth through homeownership; they just know that it happens. This article is intended to help you teach them how homeownership contributes to wealth building.

First: Equity. At its simplest, homeowners build wealth by growing the equity in their home. There are several things to unpack here. 1) Equity is the current market value of the home minus however much of the mortgage is left; 2) Borrowers grow equity by making their mortgage payments.

Borrowers might only need the above explanation if they already know a little about homeownership, but first-time homeowners will need an example. Consider using this one: Let’s say that you own a home currently worth $200,000 on the market and that you owe $120,000 on that home; that means you have $80,000 of equity. That number grows a little more with every mortgage payment.

After explaining these items, consider showing the borrower how to keep track of his or her growing equity after becoming a homeowner.

Second: Why Equity? Consider explaining to the borrower that equity is like forced savings; this money automatically goes into the home and is “saved” as the borrower makes mortgage payments. This money is then multiplied as the value of the home increases, which is almost guaranteed to happen over time.

The borrower might have questions about why equity matters if it’s tied into a home and therefore not as accessible as a savings account. You can answer this in several ways:

1. No matter what, housing expenses are going to be an important part of a borrower’s budget. It’s not possible to build wealth through renting as a renter; the money spent disappears, essentially. But money spent on owning a house turns that house into an asset that the borrower owns more of every month (and it’s money that is going to be spent anyway).

2. Houses consistently rise in value over time, and they rise a lot; for example, a house worth $52,000 in 1997 is worth $190,000 today. That’s almost four times the value of the original home. Money left in a bank account doesn’t multiply like that.

3. If necessary, equity can be tapped into through refinances, but explain to the borrower why it’s wise to avoid using equity to pay for frivolous expenses. One way to explain that is to use the above example: equity multiplies a lot over time, but that growth is significantly hindered if equity is tapped into a lot, so equity should only be used to pay for very important things.

Third: Time. The final thing to help borrowers understand about equity is the time factor. Equity can build a lot of wealth, and it’s one of the reasons why homeowners are worth so much more than renters; at the same time, equity doesn’t expand exponentially overnight.

Borrowers should know that this doesn’t mean they need to be committed to thirty years in a single home just to build equity; if they move every few years, but remain a homeowner the entire time, it’s still possible for them to build equity. The goal is to responsibly handle their finances so they can avoid a foreclosure, which will remove all equity, or becoming a renter again, which will also have a negative impact on their equity.

There are, of course, many more things that a borrower will learn about homeownership, but a clear understanding of equity and how it helps the borrower build wealth will help the borrower fully understand why owning a home is so important.

 

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FHA Classic: The First Non-DPA Chenoa Fund Program

FHA Classic: Chenoa Fund’s First Non-DPA Program

A lot has changed in the mortgage industry recently; quarantines and shutdowns have forced everyone to evolve quickly in response to the coronavirus pandemic, and the results haven’t always been good. In particular, borrowers with low credit have been hit hard, and many can’t find lenders willing or able to originate loans for them because lenders are having a hard time selling loans for low-credit borrowers.

This problem can be remedied with the Chenoa Fund FHA Classic program. The FHA Classic is not a form of down payment assistance, nor does it include DPA; rather, it’s an option that enables lenders to originate loans with borrowers in low FICO brackets and then sell those loans.

Why should lenders consider using FHA Classic?

As mentioned previously, the coronavirus pandemic upset the mortgage industry: large aggregators currently aren’t interested in buying loans attached to borrowers that have a FICO score of less than 680. This situation prevents a large amount of borrowers from getting mortgages and, in turn, reduces income to lenders at a time when money is growing tighter; these lenders have no one to sell these loans to! (The exception being a few aggregators who won’t pay premium prices). This situation is understandable, but hardly desirable.

The FHA Classic program fills this gap for CBCMA’s correspondent lenders. These lenders can originate loans and have them bought by CBC Mortgage Agency, thus growing the pool of viable borrowers closer to pre-coronavirus levels. More borrowers means more loans and more income. The FHA Classic program also has a YSP favorable to lenders; contact our Locks team at locks@chenoafund.org to get more specific numbers.

 

In short, FHA Classic helps lenders beat the pandemic and responsibly make more money while serving more borrowers.

 

What are the requirements of FHA Classic?

The following summarizes FHA Classic’s program requirements:

1) No DPA or second mortgage

2) Minimum 640 FICO

3) Available for FHA purchase, Streamline refinance, rate and term refinance

4) No income limits

5) DTI 50% or less

6) 96.5% LTV

7) First time homebuyer not required

These simple requirements enable CBCMA to keep this program running.

 

How can I take advantage of this program?

You already have access to our program if you are a correspondent lender; contact your account executive, or info@chenoafund.org, to learn more.

If you aren’t a correspondent lender with CBC Mortgage Agency, contact info@chenoafund.org to learn how to join.

 

 

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Conventional Homebuyer Education Reminder

For those who have Conventional loans locked with us, we want to remind you that on 10/2/19 Fannie Mae updated its homebuyer education requirements making homebuyer education mandatory on most loans with an LTV of 95% or greater.  Even though CBCMA may not require it, if your AUS approval requires it, you will need to include the completion certificate demonstrating that at least one of your buyers completed an acceptable course.

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FHA CLASSIC PROGRAM

Today CBC Mortgage Agency begins offering a traditional FHA loan not associated with a down payment assistance loan to help with the void created as many aggregators pulled out of the market or significantly cut back their YSP schedule. This product is available for purchase, rate and term refinance, or streamline refinance, FHA insured loans. Optimal Blue will begin reporting the pricing in two weeks, but loans can be registered in our system beginning today. This is only available for those who have migrated to our proprietary loan registration software. Those on our legacy loan registration platform will need to migrate to our new platform in order to deliver loans under this product.

 

Pricing and guidelines are available on this website.

 

Correspondents will need to contact their account executives to enable this product in their loan registration menu.

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Borrowers With Good Credit Need Down Payment Assistance Part 2

Last week we discussed several financial reasons why borrowers with good credit need down payment assistance. I had several other points that I wanted to make, but they didn’t fit the scope and length of that article. As a result, this week’s article includes some miscellaneous reasons and data why borrowers with good credit need down payment assistance.

 

Pragmatic
Borrowers with good credit are less risky to lend to—therefore, these borrowers should always be considered by lenders when marketing DPA. Besides, lenders take a little more risk when originating loans with a small down payment, so smart lenders should offer DPA to borrowers with good credit anyway to alleviate some of that small risk.

 

That isn’t to say anything against low-credit borrowers who need DPA, of course. These borrowers can be good investments, particularly with the right program. For example, Chenoa Fund DPA has a slightly lower default rate than FHA loans that aren’t paired with DPA—this is in part because Chenoa Fund has good homebuyer counseling that extends beyond closing.

 

Additionally, DPA helps protect borrowers in the case of a rainy day. Some borrowers have just enough savings to afford a down payment now, but would drain their savings buying a house; these borrowers may be better off using DPA and keeping their savings for emergencies. All borrowers have unique circumstances, but borrowers need to know their options in order to make the best decision for themselves.

 

Social
Research shows correlation between owning a home and many social benefits, according to the Journal of the Center for Real Estate Studies.

 

Here are a few:

  • Homeownership has a positive correlation with higher education (as in, children of homeowners are more likely to stay in school and go on to higher education)
  • Homeowners are more likely to participate in local and national civic duties (such as participating in local government or being an active voter)
  • Homeownership contributes towards stable neighborhoods, which in turn lowers crime
  • Homeownership has a positive relationship with physical and mental health
  • Borrowers are better off using DPA and accessing these benefits sooner rather than later, particularly if all that stands between them and homeownership is a down payment.

More Financial Reasons

Last week’s message was, summarized, “homeownership is a financial escalator: borrowers are better off getting on the escalator sooner rather than later.Attom Data has some further information that supports this argument:

  • Buying is more affordable than renting in 54% of US counties—it makes little sense to not help borrowers in these counties buy.
  • Rent is rising faster than wages in 60% of markets—borrowers in these markets need help escaping the rent cycle.
  • Home prices are rising faster than rent in 59% of US markets—borrowers in these markets are served well by buying now and taking advantage of this value increase.
  • Buying is more expensive than renting in the nation’s most-populated counties—but renting still doesn’t contribute toward wealth accumulation for borrowers. Borrowers should still be aware of their options (including DPA), particularly if they can reasonably afford the monthly mortgage payment.
    This all contributes toward the point that borrowers with good credit ought to know what their options are—and these borrowers need access to DPA to help them take advantage of those options.

To Sum Up

The benefits of homeownership are vast, ranging from social to financial. These benefits shouldn’t be denied to any borrower who can afford a mortgage payment. Borrowers need to be made aware of DPA as an option to help them become homeowners, particularly borrowers with good credit.

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Down Payment Assistance Can Help Bridge the Homeownership Gap

Richard Ferguson, President, CBC Mortgage Agency

 

Q: The Urban Institute recently released a report entitled “Breaking Down the Black-White Homeownership Gap.” What is your key takeaway from the report?

A: The report brings into focus a huge racial disparity in homeownership, with nearly 72 percent of white adults owning property while less than 42 percent of black adults own their homes.

 

Q: What is the biggest factor in the disparity?

A: Income was identified as the biggest factor in the gap. Though the median income in the US for white households exceeds $61,000, the median income for black households was less than $39,000. If the disparity in income were eliminated, the homeownership gap would be slashed by 31 percent.

 

Q: Was income the only factor in the disparity?

A: No. The report also highlighted how black households are less likely to marry. If the marriage rate were the same between black and white consumers, then the homeownership gap would be cut by 27 percent.

 

Another factor is credit scores. More than half of white households have a FICO score higher than 700. But among black households, just 21 percent have credit scores of more than 700. In addition, more than a third of black households don’t have enough credit to generate a credit score, while that share is just 19 percent among white households. Without the credit score differences, the gap would be reduced by 22 percent.

 

Q: Are there any other factors impacting the homeownership disparity that aren’t mentioned in the report?

A: Definitely. One of the biggest factors is intergenerational family wealth. White families are far more likely to have the resources to help family members with a down payment for a home purchase. But that level of wealth is lacking among black families.

 

The lack of family wealth also plays a role in credit scores, since black families are less able to provide financial assistance to family members who are in distress.

 

Q: How does down payment assistance, such as the programs offered by CBC Mortgage Agency, impact homeownership disparity?

A: That’s a great question. Down payment assistance programs can have a huge positive effect on the ability of black households to transition from renters to homeowners because they help eliminate the gap created by the lack of intergenerational wealth.

 

Not only does it provide black families with the ability to make a down payment, but giving these families an ownership stake in their community makes the community itself better. That is because there is a newfound pride of ownership by these families, incenting them to take better care of their homes and play a bigger role in the welfare of the community.

 

Our own research has found that more than 90 percent of down payment assistance recipients would not have been able to purchase a home without such assistance.

 

Q: HUD has stated that down payment assistance has a negative impact on FHA performance. Is that an indication that down payment assistance will lead to more foreclosures?

A: No. It’s true that the FHA has suffered losses from down payment assistance in the past. But that was before the financial crisis, when home sellers indirectly provided the assistance and raised the price of the property to cover it.

 

Seller-funded assistance is no longer around, and today’s down payment assistance programs like CBCMA’s don’t have the same effect on FHA loan performance. This is supported by a report prepared for the Federal Reserve Bank of St. Louis by the Harvard University Joint Center for Housing Studies that indicated down payment assistance has no significant impact on loan performance.

 

HUD must consider this evidence — that down payment assistance does not have a harmful impact on FHA risk — and avoid tampering with these valuable programs that are successfully helping bridge the racial gap in U.S. homeownership and helping to make FHA a better option for all consumers.

 

Richard Ferguson is president of CBC Mortgage Agency, a nationally chartered housing finance agency and a leading source of down payment assistance that helps low-income consumers, often in minority neighborhoods, achieve the dream of homeownership. He can be reached at richard.ferguson@chenoafund.org.

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Borrowers with Good Credit Need Down Payment Assistance: Part 1

Borrowers with good credit need down payment assistance (DPA). Unfortunately, DPA is often marketed only towards buyers with poor credit, which creates an unfortunate have/have-not scenario: houses get purchased by borrowers with poor credit or borrowers with good credit and large savings, but not by borrowers with good credit and low savings, even if these borrowers can afford a monthly mortgage payment. This situation unnecessarily locks borrowers out of the housing market for years while home prices increase.

 

This situation is also exacerbated by the facts that borrowers with good credit are often advised to save up for a down payment and other options might not be mentioned. These borrowers are sometimes never aware that they could buy a home now with some assistance, and that buying a home now may achieve more in the long run.

 

That said, why is down payment assistance the better option for borrowers with good credit?

 

Data collected by Home at Last shows that DPA helps all borrowers accumulate wealth faster by buying now, with down payment assistance, than saving now and buying later. How? Home prices, on average, go up (Home At Last shows overall increase from 2000 to 2017). Sometimes there’s a downturn in the market, even a big one, but homebuyers will likely see price appreciation if they stay in their home for 3–8 years. This means wealth accumulation for borrowers who use DPA and buy now. This also means a higher down payment down the road and very little wealth accumulation for borrowers who rent and save now. This disparity is even greater for borrowers with good credit, who can often get better rates even on mortgages with down payment assistance. This reasoning is supported by Home At Last’s projected numbers that, in a three-year period, a borrower who buys a $300,000 home using DPA will accumulate about $60,000 in wealth more than a renter who spends that period saving for a down payment. Those are significant numbers, particularly for low- to moderate-income borrowers.

 

Home at Last’s data is substantiated by CBC Mortgage Agency’s own numbers (CBCMA is the company that provides Chenoa Fund, a DPA program), as reported in the National Mortgage Professional Magazine. From 2016 to 2020, 96% of borrowers who used Chenoa Fund had an average home value increase of $27,000. Especially considering how new loans from 2019 and 2020 bring the average down, that’s a really good number. Most of those borrowers are low- to moderate-income, and many with credit scores as low as 620. It is awesome that these borrowers are able to break out of the renting cycle and see real wealth increase. Just as good, some of those borrowers have great credit scores and are realizing the same benefits. Clearly, down payment assistance should be offered to any borrower who needs it and can afford a monthly mortgage payment.

 

Home and Last’s data and CBCMA’s data fuel compelling arguments that buying now with DPA is the best option for borrowers who can afford a monthly mortgage payment. And, with over 50% of renters seeing the down payment as the primary obstacle to homeownership (Urban Institute), the need for DPA couldn’t be more relevant. The best thing to do now is to bring DPA to more borrowers with good credit scores.

 

Next week’s article will discuss more reasons why borrowers with good credit need down payment assistance.

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CBC Mortgage to Assist DPA Borrowers During COVID-19 Crisis

As seen on National Mortgage Professional

CBC Mortgage Agency (CBCMA) has announced that it is taking steps to ensure that its borrowers are able to stay in their homes during the Coronavirus pandemic.

 

Many CBCMA borrowers receive a forgivable second mortgage in order to pay for closing costs and a downpayment. As a condition of that forgiveness, a borrower must maintain timely payments on the first mortgage during the first three years of the loan. In response to growing borrower concerns about the economy, CBCMA announced any borrowers facing possible job loss would not lose the forgivable feature of their second mortgage.

 

“There’s a crisis upon us, and the economic repercussions are only beginning to be understood,” said CBCMA President Richard Ferguson. “What we do know is that COVID-19 is causing a severe shock to our economy and loss of income for many, including the new homeowners we’ve striven so hard to help. The measures we’re taking today are intended to help our borrowers keep their homes during this very challenging time.”

 

Since the pandemic, Ferguson said, questions have poured into CBCMA from borrowers who are concerned about the status of their loan forgiveness, should they lose their jobs in the current economic environment.

 

In addition to protecting the forgivable feature of its downpayment assistance program, CBCMA is reaching out to borrowers and offering education on how to handle the crisis. Through a letter sent by Money Management International, a HUD-approved non-profit counseling service, the company is advising borrowers not to overreact even as the barrage of constant coronavirus news coverage unfolds.

 

CBCMA is also counseling borrowers to reduce the impact of the pandemic by cutting their expenses. This includes not overbuying supplies and not making future travel and event plans that include non-refundable fees. In addition, borrowers are encouraged to stay current on their mortgages if possible. If a borrower is facing economic disruption, CBCMA will counsel them by reviewing their budget and finding ways for them to prioritize their spending.

 

“We expect more calls from borrowers asking us for help in dealing with their challenges, and we will continue stepping up to provide assistance,” Ferguson said. “Doing so is just as important as helping borrowers overcome downpayment barriers so they can afford the dream of homeownership-which is a dream worth protecting, especially today.”

See publication here.

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When is it time to buy a home?

By: David Ludlow

Most Americans dream of owning a home, and it’s not hard to understand why. Homes represent stability and wealth—even owning a modest home in a low-income neighborhood is a big step up for many American renters, renters who appreciate the stability of monthly mortgage payments over increasing rent, and who appreciate having the control to do whatever they want with their house. Unfortunately, many Americans, even though they dream of owning a home, don’t believe that they will ever become a homeowner.

 

Many unique challenges prevent people from even looking into buying a home; you’ve probably heard many of these challenges before, or may be living one. A very common challenge is money: Rising rents and other living expenses make it difficult or impossible to save up. It can be very hard to create savings as a single parent, or as someone who has to pay large medical bills. Student loans and other debts can make people feel trapped. People find other difficulties based on their stage of life: Young couples may be afraid of the commitment a mortgage represents, or afraid of settling down. Couples nearing retirement who have never owned a home may not believe that they would be able to afford a home on retirement income.

 

These examples of challenges come from many of the people we at CBC Mortgage Agency have helped become homeowners. These people had high aspirations for where they wanted to go in life, but difficulty homing those aspirations, so to speak.

 

So when is it time to buy a home? How did these people take their unique situations and put themselves where they needed to be to accomplish their dream?

 

There’s no simple answer to knowing when to buy a home—but putting yourself in the right situation will help you be ready when opportunity arrives. These three steps can help you prepare yourself to become a homeowner:

 

1) Want to own a home. The first step is the simplest, and you’re probably already there if you’re reading this article. If you want to own a home, let that desire compel you to act. In particular, set realistic goals and write them down—“Spend thirty minutes weekly researching the local housing market” is an example of a specific goal you have direct control over. You could start on websites that list houses, like Zillow, or by looking up real estate blogs about your area.

 

2) Educate yourself. There are many benefits to educating yourself on how mortgages, house hunting, and homeownership works. One benefit is the confidence that comes with knowledge. Another is an awareness of all the tools at your disposal. Consider doing the following:

  1. A) Research the benefits of owning a home versus renting—this can help you overcome concerns you have about the risk of being a homeowner.
  2. B) Research how mortgages work—just a little bit of research can show you that mortgage payments are often the same as rent, or lower. Even if a mortgage payment is a little higher than rent, mortgage payments accumulate wealth, while rent never does; seeing how this wealth accumulates over time will help motivate you.
  3. C) Contact lenders and realtors in your area—they can help you find out what price range you can afford and where to look for homes. They can also point out ways to improve your financial or credit situation, or resources to get financial help and advice. Most lenders and realtors can be contacted online, which may feel more comfortable if you don’t want to set up an appointment or phone call.
  4. D) Research payment assistance options in your area—from down payment assistance to rent-to-own, most states and cities have a large variety of programs that want to help you, affordably and responsibly, become a homeowner. As an example, Chenoa Fund down payment assistance operates in every state except New York and has low entry requirements.

 

3) Maintain Awareness. This step is essentially a continuation of the above two steps. If you want to own a home, and if you continually strive to educate yourself about the housing situation in your area, and what assistance options are available to you, and what lenders will be best for you, then you have put yourself in the best possible situation to know when a home within your budget is on the market and what resources you have to get that home. The best part is, once these pieces slide into place, most Americans, even those in difficult situations, realize that they found their time to buy a home.

 

If you do your best to follow the above steps, there’s no guarantee that you will find a home to buy tomorrow or even in a few months. But you will know that these steps are working for you when you find confidence and purpose in your dream of homeownership; you will grow in knowledge of what responsible homeownership looks like and where you can find resources to help you, and you may even make contacts among realtors or lenders who can help you find a home and then buy that home.

 

And, if you are in a difficult situation, you will know these steps are working for you when you find an assistance program that meets your specific needs. For example, if you don’t have enough savings for a down payment, consider Chenoa Fund down payment assistance, a program offered by CBC Mortgage Agency. Chenoa Fund provides 3.5% DPA assistance on FHA and conventional loans and accepts borrowers with FICO scores as low as 620—often the exact bump someone needs to become a homeowner.

 

So when is it time to buy a home? If you keep yourself educated and up-to-date, you will know when the opportunity comes for you.

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