Four Things to Remember When You Use a State Bond Program for Your Mortgage
The days when consumers could offer up a 20% down payment are long gone now. In fact, the National Association of Realtors estimates that the average down payment in 2016 was right around 11%. But even 11% can seem out of reach to homeowners, especially when you consider the average price of a purchased home in December 2016 was $390,100. At that price, the average down payment would be $42,911, which, for most of us, seems like a pretty intimidating amount of money.
I know that intimidation well; my wife and I went through the home buying process for the first time earlier this year. Luckily, Florida had a state bond program designed specifically to help homeowners pay for their closing costs and down payments. These state bond programs have a specific set of requirements, often asking borrowers to meet certain income and credit-score criteria in order to be eligible to qualify for the program.
To help you understand how bond programs work, I’ll draw on my own experience and provide insight from two experts: Michael Gayda, a Jacksonville-based senior loan officer with PrimeLending; and Brett Maternowski, a Realtor at Tampa’s Dalton Wade Real Estate Group.
State Bond Programs May Limit What You Can Do With Extra Cash at Closing
Your state’s bond program may have a provision that requires that all extra cash at closing be applied toward the mortgage. In other words, if the money you get from the bond program – in Florida, it’s $7,500 to $15,000 – covers closing and your down payment and there’s extra cash left over, you might be required to use that money to pay your principle.
The same goes for the good faith check you write at the beginning of escrow. We were under the impression that, since our bond program would pay for the entire down payment and closing costs, we would get our deposit back. Unfortunately, that wasn’t the case because of the restrictions on our program. It’s not all bad, though. Any money you can pay toward your principle is money well spent.
A Real Estate Agent Who Knows the State’s Bond Programs is an Invaluable Asset
Brett Maternowski offered this tip because not every real estate agent is familiar with the nuances of their state’s bond program. Considering how many stipulations there are to bond programs, finding a well-versed agent can make life much easier for you.
“Contact a good agent or lender first to find out about the bond programs available in your area,” Maternowski said. “Make your first question be, ‘Can you tell me about the bond program?’ If they don’t know, move on and contact your area’s bond program director and ask them to refer you to someone.”
Your loan officer is going to be the one crunching the numbers for your bond eligibility and will package it with your mortgage, but it helps to have an agent and loan officer who know the program well.
State Bond Programs Are a Mix of Broad Rules and Detailed Requirements
When you’re buying a home, it’s easy to get caught up in the house of your dreams. As the optimist, you assume your financing will go through – state bond included.
However, Michael Gayda said, be prepared to pass several levels of metrics in order to qualify for your state’s bond program.
“The qualifying criteria can vary from program to program, but usually include the following; may not have owned a primary residence within the past three years, must earn enough to qualify for the financing, but still be under the income caps that are in place to help target funds, must meet the minimal credit score criteria, and the purchase price must be within the targeted cap,” Gayda said.
This is exactly how our experience happened. In Florida, the bond program requires that you have an average credit score of at least 640, income below around $82,000 for a family of three and a debt-to-income ratio of 43% or less for the mortgage we chose. The criteria is even deeper than this though, with certain programs requiring additional displays of creditworthiness including no foreclosures or bankruptcies in the past two and three years, respectively and no late payments on credit lines in the past year.
You Won’t Have to Pay Your Bond Money Back, But You Will Pay a Higher Interest Rate
This point reveals that state bond programs tend to have a good side and a not-so-good side. The positive to these programs is that you typically don’t have to pay the money back if you live in the home for a certain amount of time. In Florida, it’s five years. The downside to state bond programs is that they work in conjunction with conventional, fixed-rate mortgages and they dictate the interest rates on those mortgages. So, while interest rates may be as low as, let’s say, 3.98% based on your credit score, a state bond program may have a 4.75% interest rate on all mortgages paired with the bond program money. In the short-term, this isn’t as big of a deal, but the longer you own your home, the more interest the state earns from your mortgage.
Wrapping Up State Bond Programs
Our experience with Florida’s bond program was excellent. While I knew we were paying a higher interest rate than what we could’ve gotten on the open market, I knew that, without the bond program, we wouldn’t have been able to buy our house in the first place. Besides that give-and-take, we saw the bond program as a very helpful way of making homeownership possible to families and individuals.
My advice is to study up on all the options your state bond program offers. Become an expert in the different rules and regulations associated with the loan. This way, you can avoid any surprises that might pop up during escrow, especially in the days leading up to closing. And remember this: Bond programs typically require you to take a homeownership class so you’re clear on the basics of a mortgage and how it will affect you in the long run. Ask your loan officer or agent about when and where you can take these classes – sometimes they happen in-person and sometimes you can take them online.
“These programs are continually changing and funding comes and goes,” Gayda said about bond programs. “It’s always best to speak with a lending professional to get specifics for your situation and programs in your area.”