Partners (Spring 1997)

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Houma Loans
by Courtney Dufries

In an effort to increase the number of families eligible for home purchase through Catholic Housing Services, the nonprofit has joined forces with local financial institutions to develop an innovative financing program that allows home buyers with incomes as low as $7 per hour to qualify for the purchase of homes selling for $62,000.

Using an innovate financing technique called the "Deposit Option" that was featured in the Federal Reserve Bank of Atlanta's Partners software program for home mortgage lending, the nonprofit can more than double the number of families eligible to purchase homes with the grant money available. The following is an example of how the financing program is designed to work in Houma.

Given the criteria presented in the example provided, an applicant could only afford to purchase a $44,538 home, even with assistance provided by the Federal Home Loan Bank of Dallas and the Terrebonne Parish government. However, by utilizing a $6,600 grant from Catholic Housing Services, the applicant could meet the underwriting criteria and qualify for a $62,000 purchase.

Unfortunately, providing a $6,600 grant for each potential home buyer is expensive and would prevent the nonprofit from providing other services, such as emergency grants, land acquisition expenses, or other programs. By utilizing the "Deposit Option" the nonprofit can reduce the amount of the grant needed from $6,600 to only $3,272.

Applicant Income: $1,200 monthly (assumption)
Home Purchase Price: $62,000
 
Applicant out of pocket expenses: $1,500 (assumption)
Federal Home Loan Bank assistance: $6,000
Terrebonne Parish assistance: $10,000
 
Taxes and Insurance on home: $40 monthly
Applicant's other debt payments: $90 monthly (assumption)
 
Underwriting Criteria:
"Front" ratio *
28% "Back" ratio ** 38%
Term in months:
360 Interest rate: 8.25%
 
* (Principal, Interest, Taxes and Insurance/monthly gross income)
** (PITI plus other monthly debt payments/monthly gross income)
 
Required principal and interest payment: $345.58
Applicant's available payment: $296.00
Shortfall: $49.58 /mo.
 
Catholic Housing Services Assistance needed: $6,600
Deposit Option alternative assistance provided: $3,272
Catholic Housing Services Savings on each home: $3,328

Instead of paying $6,600 at closing to qualify the applicant, the nonprofit will instead place a $3,272 deposit in a non-interest bearing account with a local participating lender. Each month for the first year the applicant pays $296 to cover the principal and interest payment on the loan, and the deposit account is automatically debited $49.58, the shortfall needed to cover the loan.

In the second year, the applicant increases his or her monthly payment by $4.96, to $300.96, and the deposit account is debited for only $44.62. The subsidy is phased-out over ten years this way so that each year, the applicant pays an additional $4.96 a month for that year, until the subsidy is completely eliminated. As a result, the amount of subsidy needed is only $3,372 instead of $6,600, saving the nonprofit $3,328 per home!

Of course, the lender and nonprofit should use caution to ensure that the borrower is never hit with an excessive payment increase (referred to as payment shock) in any year. In this case, the monthly increase amounts to only $4.96 a month, or .41 percent of the applicant's monthly income. In other words, the borrower needs an income increase of less than 5 cents an hour each year for the 10 year subsidy period to never experience a relative increase in payments. And the nonprofit can double the number of families it helps qualify for loans. Further, because the lender has the deposit account as additional collateral on the loan, its initial loan to value ratio is lower than it would be without the deposit option.¨

For more information on the "Deposit Option," contact Courtney Dufries at the Federal Reserve Bank of Atlanta, (404) 498-7226.

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