How Can You Increase Your Borrowing Power?

A number of approaches have been discussed to give you the greatest opportunity to buy the house that is right for you. Along with a review of these approaches, we explore other resources that may be helpful.

Before you begin to explore the financing options available to you, it will be important to have a clear idea of how much money you will need to obtain from outside sources. If you have taken a good look at your income and expenses and carefully thought about the other suggestions in this chapter, you should be fairly certain of your needs. You will also want to think about what types of ongoing assistance you may need if you buy a home.

Later in the process you will probably sit down with a lender to discuss how much you can afford to pay for a monthly payment, or PITI. This process is called pre-qualification because it qualifies you for the amount the lender may be willing to lend you when you find a house. If you are pre-qualified by a lender, you will have a good idea of the price-range for a house that you are able to afford. For now, you may estimate how much you can spend for a house by completing the budget worksheets found later in this chapter.

As we discussed earlier in the chapter, using a combination of a person’s available resources increases their chances of purchasing a house. As people with disabilities begin to look at nontraditional funding from a number of sources, they have become successful homeowners. New collaborations between people with disabilities, lenders, family members, and people who provide assistance have been invaluable in this process.

To illustrate how resources from several sources can be combined to make purchasing a home a reality, let’s look at Joe’s situation. Joe found a house he wanted to buy, with a purchase price of $60,000. He received a combination of a mortgage loan, grants, secondary loans (all the secondary loans were thirty-year forgivable loans with no accruable interest and payable only upon sale of the home), and gifts. He received a loan from a private lender for $35,000 and used a combination of grants and loans for a down payment of $25,000. Joe’s closing costs totaled $4,500 and were covered by a combination of grants and a second mortgage. Joe’s church paid for needed house repairs costing $500. Renovations needed to make his home accessible totaled $6,000 and were paid for with a combination of gifts, grants, and a secondary loan. The chart that follows shows the various funding sources that were blended to make it possible for Joe to complete the purchase.

While Joe’s situation provides us with an example of someone who used a combination of several different resources to purchase a home, it must be noted that this same combination of resources is unlikely to occur. Using Joe’s resources as an example provides a look at the variety and type of resources that may be used. Each home seeker will put together his or her own combination of funding sources depending upon that individual’s income, benefits, and collaborations established with local lenders and community organizations.

*This table’s purpose is to identify all of the possible funding sources a person may be eligible for. Every borrower may not be eligible for all of these sources of funding.

** For some mortgage programs, like Fannie Mae HomeChoice

This guide is dedicated to the idea that home financing must be creatively tailored to each person's unique circumstances. It is hoped that by sharing experiences and resources, you may learn strategies that will be helpful as you continue through your home-buying process.

Establishing a trust is one way for parents and other family members to give money or property to an adult child with a disability. A trust is a fiduciary arrangement established by a legal agreement between two or more people where one person places money or property in the name of an individual or a bank (the trustee) for the benefit of another person (the beneficiary). The trustee owns the property but is legally required to use the money or property for the benefit of the beneficiary. By creating the appropriate type of trust, parents may give a gift of down payment money, so that their son or daughter will not lose public benefits. A trust is a complex legal document that can affect public benefits and taxes. If you are considering this option, it is important to consult an attorney who specializes in trusts.

People with disabilities have been successful in purchasing homes. Some of the resources they used are described next. Most of the funds listed were obtained through lenders.

Housing Finance Authorities in several states have developed strategies for helping people with disabilities become homeowners. Working cooperatively with people with disabilities and service providers, Housing Finance Authorities may be able to provide funds to assist in securing down payment, closing costs, renovation assistance, and low interest loans.

For people with low to moderate incomes and limited savings, the greatest barriers to homeownership are coming up with the down payment and closing costs, and managing housing expenses that often are higher than the qualifying guidelines permitted in traditional mortgage lending.

Fannie Mae, in cooperation with housing providers, offers financing options that are designed to overcome common barriers to homeownership experienced by low- and moderate-income households. These options are offered in partnership with lenders, mortgage insurers, government agencies, and non-profit organizations across the country.

The Federal Home Loan Bank System, created by Congress in 1932, was intended to promote home financing. There are now 12 Federal Home Loan Banks (FHLB) in various cities around the country. These banks do not lend money to individuals. Their role is to loan money to Federal Home Loan lenders specifically involved with housing finance. In particular, they are interested in ensuring that lenders offer financing to low-income buyers.

There may be community grants or loans that are unique to your city or county. For example, Joe received money for his down payment from Community Development Block Grant (CDBG) funds and a secondary loan from HOME funds allocated to his city. In addition, he received funds from the county through a first-time home buyers’ program. Joe was eligible for these funds because of where he lived. To find out if there are such grants or loans available in your area, check with your city or town hall, county office, the Chamber of Commerce, and the public housing agency in your area.

Each year, the U.S. Department of Housing and Urban Development (HUD) provides money in the form of Community Development Block Grants (CDBG). A portion of these funds is to be used to enhance neighborhood appearance. Grants for direct assistance with homeownership are available to certain qualifying individuals.

Another pool of grant money available from HUD is through the HOME program. HOME dollars are given to states and local communities to be used to increase affordable housing opportunities. Under certain circumstances, this may include assistance to first-time home buyers in the form of loans, down payment assistance, closing costs, and renovation assistance.

These are numerous non-profit housing and community development organizations whose goal is to see that all people with low incomes have the opportunity for affordable housing. Their focus is to assist community-based non-profit organizations to develop affordable housing and community services.

Local non-profit housing corporations, located in most communities, are key information sources regarding financial assistance. They may be aware of and refer you to other funding sources, such as private development groups or foundations.

In many cases, borrowers have contributed money from earnings, savings, inheritances, or legal settlements.

Mortgage loans are available through three programs of the federal government: the Federal Housing Administration (FHA) mortgage insurance program operated by the U.S. Department of Housing and Urban Development (HUD), the Veterans Administration's (VA) loan guarantee program, and the Rural Housing Service (RHS) loan program. To obtain any of these loans, you apply through a lender that is approved to handle them. Each one is described briefly below.

With FHA insurance, you can purchase a home with a very low down payment (from 3 to 5 percent of the FHA appraised value or the purchase price, whichever is lower). FHA mortgages have a maximum loan limit that varies, depending on the average cost of housing in a given region.

The VA guarantee program allows qualified veterans to buy a house costing up to $203,000 with no down payment. Moreover, the qualification guidelines for VA loans are less strict than for either FHA or conventional loans. If you are a qualified veteran, this is an attractive mortgage program. The VA also offers a special adaptive housing program for veterans with disabilities. To determine whether you are eligible, check with your nearest VA regional office.

The Rural Housing Service, formerly known as the Farmers Home Administration, a branch of the U.S. Department of Agriculture, offers mortgage loans with no down payment requirement and with low interest rates to low-income families and market interest rates to moderate-income families who live in rural areas. Generally, "rural areas" include settled places having a population of less than 10,000, or less than 20,000, if outside any Metropolitan Statistical Area (MSA). Check with your local RHS office or a local lender for eligibility requirements, or contact Fannie Mae HomePath^SM Services at 1-800-7FANNIE (or 1-800-732-6643).

A number of states sponsor programs to help first-time home buyers qualify for mortgages. Along with local housing agencies, states offer loans that include low down payments or low interest rates to buyers who meet certain guidelines.

In addition to mortgage programs that have been designed specifically for people with disabilities, there are other mortgage programs geared toward first-time home buyers that could be helpful.

Each of these options is examined next, along with ways in which they can be combined to make it easier for those with low and moderate incomes to obtain affordable housing.

HomeChoice is a single-family mortgage loan developed by Fannie Mae to meet the needs of low- and moderate-income people who have disabilities or who have family members with disabilities living with them. HomeChoice mortgages are fixed-rate loans with 15- to 30-year terms and can be used to purchase owner-occupied, principal residences. HomeChoice mortgage loans are available through Fannie Mae-approved lenders working in partnership with groups of organizations, called coalitions, that have come together to create homeownership opportunities for people with disabilities.

The benefits to borrowers include lower down payment requirements and more flexible qualifying and underwriting for low-income borrowers. Depending on your income, the cash required from you for a down payment may range from as low as $250 up to two percent of the price of the house or the appraised value of the house, whichever is less. The balance of the required five percent down payment may be made with gifts, grants, or soft second mortgages. Closing costs, property repairs, and access modifications may also be made using gifts, grants, or soft second mortgages.

HomeChoice gives lenders additional flexibility in their standard qualifying requirements, that may increase your purchasing power. Typically, lenders require that your total housing costs (mortgage payment, property taxes, and insurance) equal no more than 28 percent of your monthly gross income (called the housing expense-to-income ratio) and that your housing costs plus your other long-term debts total no more than 36 percent of your monthly gross income (your total monthly expense-to-income ratio). HomeChoice allows higher qualifying ratios, which means you need less income to qualify for a mortgage.

If you are a borrower whose income is at or below 50 percent of area median income, you may qualify for a mortgage if your monthly housing costs plus your other long-term debts total no more than 50 percent of your monthly gross income. You must also complete a budget worksheet described earlier in this chapter that shows your monthly income and expenses and provides evidence that you can meet your housing and other living expenses even with the higher monthly expense-to-income ratio. Borrowers whose incomes are between 50 and 100 percent of area median income may qualify based on monthly housing costs not more than 33 percent, and total monthly housing and debt expense not more than 38 percent of their gross income.

With a fixed-rate mortgage, the homeowner's monthly principal and interest payments never change because the interest rate is fixed for the life of the loan.

With an ARM, the interest rate paid by the borrower is adjusted from time to time to bring it in line with changing market rates. This means that when interest rates go up, your monthly mortgage payments go up as well, sometimes significantly. On the other hand, when interest rates go down, your monthly mortgage payment should also go down.

ARMs are attractive to some borrowers because they may initially offer a lower interest rate than fixed-rate mortgages. Since the monthly payments on an ARM generally start out lower than a fixed-rate mortgage of the same amount, the home buyer qualifies for a larger loan. The chief drawback, of course, is that your monthly payments will increase when interest rates go up. How much your payments can increase will depend on the terms of your mortgage. Before agreeing to an ARM, be sure you know how high your monthly payments could possibly go -- the so-called "worst case scenario." Most mortgage lending institutions are required by law to provide you with this "worst case scenario."

You may want to consider an ARM if it's the only way you can afford to buy a house you want, and you are confident that your income will increase enough in the coming years to comfortably handle any increase in payments. If you are not confident that your income will increase in the years ahead and enable you to handle any payment increases that result from increasing interest rates, you should generally avoid using an ARM.

The Two-Step Mortgage is a type of ARM in which the interest rate is adjusted only once (at the end of either five or seven years after settlement). The new rate then remains in effect for the remaining years of the loan. This loan typically carries a lower initial interest rate than a traditional fixed-rate mortgage and it protects home buyers from rising interest rates during the early years of homeownership, prior to the interest rate adjustment. For those homeowners who anticipate that they will move (and repay their mortgage) within five or seven years of buying a home, this may be a very appealing mortgage. However, if you are planning to buy a home to settle in for the long-term or it appears that market interest rates will increase, you may prefer a fixed-rate mortgage that offers you the certainty that your monthly principal and interest payments won't increase to a level that may become difficult or impossible to manage.

With certain types of loans, you may be allowed to use a seller take-back mortgage. If a seller has not paid off the entire mortgage, you may be able to assume the balance of what is owed. Assuming a mortgage means taking over the responsibility for paying it off. If the interest rate on the seller’s mortgage is lower than the current rates, this may be to your advantage. In addition, the balance on the mortgage may be far less than the purchase price of the house. This means you must either come up with a very large down payment, or get the owner to finance all or part of the difference. If the owner is willing to finance the difference, be sure you can afford both mortgages.