Dreaming of buying a home but tight on cash? Can you come up with $1000? With the City of Portland Home Purchase Assistance program (HPAP), $1000 is all you need to buy a home of your own. Read on for the details and a side-by-side comparison of the Portland HPAP and a traditional 3% down loan.
Qualifying is easy. Basic borrower qualifications:
• You don’t have to be a first-time buyer, but you cannot own any other real estate when you close on your new home purchase.
• There is no limit to your household income, but the income of all borrowers on the loan can’t exceed $113,960 as of 2/1/19 (140% of median income).
• You must contribute at least $1000 toward the purchase. A gift is allowed to cover your $1000.
• You must have a minimum credit score of 640.
• You must qualify for a conventional mortgage.
The property you buy must meet a few simple criteria too.
• It must be located in the City of Portland (check com).
• You can spend any amount you want, but you can’t borrow more than $484,350.
• It must be your primary residence.
• The property you buy can be a house (including a house with an ADU), condo or townhome. Manufactured homes, floating homes, duplexes, triplexes and 4-plexes are not allowed.
103% Financing = No Down Payment
The Portland HPAP is really two loans, that work together. The main mortgage is up to 97% of the price. The secondary mortgage is where the magic happens. You choose a second mortgage amount of 4%, 5% or 6% of your first mortgage amount. Combined, you are able to borrow up to nearly 103% of the price of the home you are buying.
The down payment assistance loan covers all of the 3% down payment required by the first mortgage. Assistance that exceeds the down payment can be used to pay closing costs.
Forgivable, Interest Free Loan
The second mortgage is at 0% interest and requires no monthly payments. Every month, 1/120th of the second mortgage is forgiven. At the end of 10 years, the entire balance is forgiven.
If you refinance or sell your home during the first 10 years of ownership, you will owe whatever balance hasn’t been forgiven. For example, if you sell in 5 years, you’ll pay off half of the original second mortgage balance.
Bonus Free Money
In addition to the interest-free second mortgage, the HPAP program may come with an Affordable Income Subsidy (AIS) Grant. If your income is 50% of median income ($40,700 as of 2/1/19) or less, you’re eligible for a $2500 grant. If your income is over 50% but no more than 80% of median income ($65,120 as of 2/1/19) you’re eligible for a $1500 AIS grant. This grant can go toward closing costs or your down payment and never has to be repaid.
$1000 Minimum Contribution
The minimum amount you are required to pay is the lesser of 1% of the price of your home or $1000. For most Portland buyers, this means $1000 is all you’ll be required to pay to buy a home.
Seller Credits Welcome
Even if you chose 6% HPAP assistance, you’ll probably start out with more than $1000 due at closing. Why? In addition to 3% down, you have to pay closing costs and prepaids. To understand all the costs due at closing, check out this earlier post.
But if you can’t cover the difference, don’t despair… negotiate.
Sellers are permitted to pay any closing costs not covered by the HPAP assistance (and any AIS grant for which you qualify). Work with your real estate broker and negotiate to have the seller pay a credit to your closing costs. Some sellers won’t be willing to pay costs (for example, a hot new listing with multiple offers), but in many cases a seller may be willing to contribute to your costs.
Generous Income Limit
The Portland HPAP allows “qualifying income” of up to 140% of Portland’s median income. As of this writing that’s $113,960. This limit applies regardless of household size. Only income an underwriter includes when qualifying you and any co-applicants for the loan counts toward this limit.
This is very different than many other down payment assistance programs, which often limit household income to 80% or 100% of median income. Income earned by family member (or even roommates) must fit under these limits, whether they apply for the loan with you or not.
The higher income limit and simplicity of the Portland HPAP means higher income households can qualify for assistance. Be strategic when you apply. If you qualify without including your spouse or partner on the loan, leave them off of your application.
If however, your income is not adequate to qualify, you are not allowed to have a cosigner who won’t live with you. All applicants for the loan must plan to reside in the home.
No first-time buyer requirement / No recapture tax
Unlike many other down payment assistance programs that are limited to first time buyers, the Portland HPAP is open to prior homeowners. At the time of loan closing, you cannot own other real estate. You are allowed to sell a home and buy another later the very same day, using the HPAP.
If you are a first-time buyer (defined as having not owned a home in the past 3 years), you’ll be required to take an online homebuyer education course prior to closing.
Although the program is limited to single-family residences, a home with an accessory dwelling unit (ADU) is allowed. If you buy a home with an ADU, you are allowed to rent it out (long term or on AirBNB).
Discounted, Cancelable MI
Like most any other mortgages with less than 20% down, the HPAP requires mortgage insurance (MI)… but with a really nice twist. The mortgage insurance coverage required is at a lower-than-normal coverage amount. MI costs vary based on a number of variables (especially credit scores), but across the board, the premiums for an HPAP loan will be less than those on a standard 3% down loan. In the examples below, the MI is $60 to $100 less per month.
And because the HPAP is a conventional mortgage, the mortgage insurance can be canceled or paid in a one-time premium. The lifetime costs of mortgage insurance on an HPAP loan can be significantly lower than on an FHA loan with MI that cannot be canceled.
Credit Scores Matter
Standard 3% down conventional loans are subject to something called “Loan Level Price Adjustments” (LLPAs) which are, in essence, risk premiums. If you buy a condo or have a credit score is below 740 (among other things), there are add-ons to what you pay for your loan.
These add-ons can really add up. If your credit score is so-so, a standard mortgage (and standard mortgage insurance) can get very expensive.
The HPAP program has no LLPAs. The result? You can think of the HPAP as having one-size-fits all pricing. Whether your credit scores are amazingly awesome or so-so, you pay exactly the same for the loan.
What’s the catch?
Is all of this sounding too good to be true? There is a little bit of a catch. The HPAP interest rates are higher than the rates on a standard loan. As of this writing, the HPAP is available at 4 interest rate options — the more assistance you want, the higher the first mortgage rate you’ll pay.
If you have the money to pay your own way and don’t need the assistance the HPAP offers, you will pay less interest over time and you might be better off with a more traditional loan.
But if you can’t come up with the funds to buy any other way, the HPAP offers a lot of help for a little bit of extra interest. And the reduced mortgage insurance coverage and potential to pay MI all at once can offset some of the difference.
Real World Example – 780 FICO
Are you curious to see how this plays out in the real world? Let’s get to it!
In all of the examples below (rates as of 1/29/19), I’ve assumed a $400,000 purchase price, $4800 property taxes, $900 insurance. The first set of numbers assume a 780 credit score.
Standard 3% down versus HPAP with 780 credit score:
A person with a high credit score will qualify for relatively favorable interest rates and mortgage insurance costs on a standard loan, so the higher HPAP rate results in a payment that is $140 to almost $190 more per month.
If you can live with the extra payment, however, you’ll need a lot less money to close. The very least you need on a standard 3% down loan is $12,000 (assuming the seller agrees to pay $11,000 of closing costs for you). With no help from the seller, an HPAP purchase requires no more than $6700 to $9770. And, of course, with a $5000 to $9000 of help from the seller, you need just $1000 to buy with the Portland HPAP.
No Monthly MI
Take a closer look at the last column above. Even though it has the highest interest rate, it also has the lowest monthly payment. What gives? It’s not witchcraft or funny math… it’s single mortgage insurance.
If you have a high credit score you may find it beneficial to use some of your HPAP assistance to pay a “single” (one-and-done) mortgage insurance premium. In the example above, a one-time premium of 1.15% of the loan pays the MI for the full life of the loan and removes it from the monthly payment. (Learn more about the magic of single MI premiums here.)
Real World Example – 680 FICO
But what if your credit score isn’t sky high? With a 680 credit score, here’s how things stack up:
The payment is still higher if you use an HPAP to purchase your home, but by as little as $50 and no more than $173. For that $173 per month, you reduce the cash you need to buy a home from as much as $23,000 to as little as $1000 to $2000.
Save More with an MCC
In addition to sponsoring the HPAP, the hardworking folks at the Portland Housing Bureau have also sponsored a Mortgage Credit Certificate program for Portland homebuyers. An MCC turns 20% of the interest paid on a mortgage into a Federal income tax credit. The MCC program has separate criteria and a few strings attached, but if you qualify for both an MCC can play out like a 20% discount on your interest rate.
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