A Conventional Loan with No Down Payment? BOOYAH!!

Finally finally FINALLY we have a decent no down payment option for buyers again. 

For the last several years we've had VA financing for our Veterans and USDA for our rural friends, but no good 0% down loan for the rest.  Last year brought some hope when IHCDA rolled out their Next Home Program.  It offered down payment money to a wide range of buyers but the buyer had to be getting a FHA mortgage to qualify.  Seeing FHA has crazy-high monthly mortgage insurance and that mortgage insurance now stays on the loan FOREVER (ugh), Next Home was a step in the right direction but it still fell short for many buyers.

Effective 9/3/13, however, things are changing.  IHCDA will now allow buyers to use their Next Home down payment money along with a conventional loan.  Let's talk about what this means to Realtors and buyers alike:

1. Down payment amount - starting in November, the minimum conventional mortgage down payment will be moving from 3% to 5%.  NOT WITH NEXT HOME THOUGH.  This one program will be allowed to keep the 3% down payment option (big win).
2. Down payment source - IHCDA will give the 3% needed for the down payment to the qualified buyer.  It is technically a second mortgage but if they stay in the home at least two years, the mortgage is forgiven and released.
3. Maximum Household Income - there are some requirements to qualify.  You can't make more than a certain amount (maximum set per county).  The chart is here: IHCDA Income Limits.  Use the two columns on the left hand side for 1 to 2 person or 3+ person households.  In St. Joseph County, a 1-2 person household can't currently make more than $59,400.  If they have 3+ people in the home, it jumps to $68,310.
4. Not First Time Buyers Only - you don't have to be a first time buyer to get this money.  You can't own another home at the time of use though.  If you own a home now, you have to sell it first.  Closing can be on the same day as the purchase of the new home though.
5. Liberal Credit Score Ranges - the credit score can be as low as 650.  The mortgage insurance will cost more at that score and it may be harder to get approved, but it is allowed. 
6. Lower Monthly Mortgage Insurance - Conventional loans have lower mortgage insurance than FHA loans anyhow, but this program offers a further discount.  That being said, the interest rate will be higher.
7. MCC Allowed - if the buyer is a first time buyer, they can use this program and the Mortgage Credit Certificate program at the same time.  This rocks big time.  To learn more about MCC, watch  this video:  MCC Education Video.

Negatives of Conventional Next Home

So what's not good about it?  A couple of things:

1. Interest rate - we don't know what the interest rate will be yet seeing they don't roll it out until next week, but we know that it will be higher than non-Next Home rate.
2. Higher Conventional Standards - the buyer has to qualify for a conventional loan and conventional loans are harder to qualify for than FHA loans.  For those who don't qualify though, they can still use Next Home money with FHA if desired. 
3. Limited Seller Concessions/Higher Fees - sellers can only contribute 3% toward closing costs and prepaid items with conventional loans.  Next Home loans have higher closing costs, so this 3% won't be enough.  The buyer will need to bring some money to the purchase for the difference.  This money can come from a gift from a family member or a loan against an asset if desired (car, 401k, etc.)  If they can't come up with the money needed, they can still use this with FHA which lets the seller give 6%.
4. Limited Sources - Most lenders are not approved through IHCDA to do these loans so the buyer can only work with a limited pool.  Luckily for me, I'm in that pool!  If your client wants to work with their 'home bank' though, they'll likely find out they can't get this assistance.

Bottom Line

So, bottom line?  This is a good option.  It's not perfect, but it's one of the best we've seen in awhile and will likely become very popular.  My team and I have done dozens and dozens of Next Home loans in the last year and we know how to navigate these smoothly and quickly.  Please call me with any questions you have on it.  I'm looking forward to helping many buyers buy now with this down payment assistance.