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This Financial Life With Anna: The American Dream Program

Do you want to buy a home but think it’s out of reach? You may be eligible for the American Dream Program which can help you buy a home for just a few thousand dollars down instead of a 20% down payment.

We know a lot about personal finance, but we can’t know everything. That’s why we love it when a listener educates us! That’s the inspiration for this episode.

Home is Where the Heart Is

We have talked a lot about buying a home, but many of the discussions have centered on rental property. And with good reason, it’s a great way to earn passive income and achieve financial independence. But for many people, a home is more than a chunk of their investment portfolio. A home is a place to call your own, a place to raise your family, and a place to make memories.

Home is the starting place of love, hopes, and dreams.

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Getting on the Property Ladder

When we talk about buying a home, whether to live in or for a rental property, we stress the importance of saving up for a down payment of at least 20%. That is so you can avoid PMI but depending on the housing market in your area, that can put buying a home out of reach of many.

PMI

When you buy a home with less than 20% down, conventional lenders will require PMI, private mortgage insurance. PMI is to protect the lender if you default on the loan, and your home goes into foreclosure.

The fees for PMI vary according to the size of your down payment and your credit score. Typically it ranges from 0.3% to 1.2% of the loan amount on a yearly basis. There are a few ways to pay for PMI. Most commonly, the PMI premium is part of your monthly mortgage payment, but some lenders require buyers to pay the entire premium up front at closing.

Paying upfront is not ideal because if you decide to refinance, you may not get the premium back. Be sure to know what your lender requires if you don’t have the 20% down payment needed to avoid PMI.

Just Say No

The median sale price of a home in the US is $225,262 so if you have a PMI of 1% you will add $188 to your monthly mortgage payment! PMI is one of the things people mean when they talk about the hidden cost of owning a home.

PMI has no benefit to the homeowner; it’s for the protection of the lender. PMI payments do not go toward paying down the principal on your loan or to building equity. Mortgage insurance is tax deductible, but PMI is only deductible for married taxpayers who make less than $110,000 per year.

If spouses file individually, the threshold plummets to $55,000. PMI is nothing more than a fee you get stuck paying if you can’t come up with a 20% down payment.

Most lenders cancel the PMI requirement once you have reached 20% equity, but some require you to keep PMI for a specified period meaning even once you reach 20%, you have to keep paying. Be sure to know what your lender’s PMI requirements are.

You’re Not Getting Any Younger

The average age of first time home buyers in the US is 33. The average age of a first-time mother is 28, and for fathers, it’s 30. So by the time you’re 33, your kids are pretty tired of sleeping in a dresser drawer in your one bedroom apartment.

10 Commandments

We would add one more commandment to the list above. Never pay PMI. But you need to buy a place now, to hell with PMI! Not so fast. That’s what Anna is here to share with us. She’ll tell us how you can buy a home with less than 20% down and still avoid the dreaded PMI.

Living the Dream

The American Dream Program began in 2003. It provides grants to home buyers to help cover down payment and closing costs. The program was implemented to increase the rate of homeownership particularly for minorities who own homes at rates below the national average. Local housing agencies administer these grants.

Who is Eligible?

The program is for first time home buyers, but you can qualify so long as you or your spouse have not owned a home for the past three years. Income requirements vary by location. Your income cannot be more than 80% of the median income for your area.

You can use the money to purchase a one-to-four family home (perfect if you want to make this purchase a home for yourself and a rental property), a condo, co-op, or manufactured home.

You do need healthy credit, and lenders want to see at least three lines of open credit so loans you have paid off already, like student loans, don’t count. What does count are even small things like a Netflix account. They want to see that you make on-time monthly payments.

credit-score-tiers

Buyers are eligible for a grant of $10,000 or 6% of the sale price of the home, whichever is greater. On average, buyers receive $7,500 which can be used for the down payment, closing costs, and other miscellaneous fees encountered when buying a home.

Anna was required to take a first-time homeowners class which should probably be a requirement for all first time home buyers.It’s not hard to see why people get excited when they plug their numbers into Zillow and see they could own an entire house for just a little more than they are currently paying for rent. But there are a lot of hidden costs to owning a home that people don’t understand.

Anna’s Story

In 2013, Anna and her husband wanted to buy a home but didn’t have much money saved. Anna was making $17 an hour with no debt and good credit.

The couple bought the home in Anna’s name. Together she and her husband made too much to qualify. If you and your spouse have a joint bank account, one of you will need to open a separate account. In the area they chose to buy, to qualify, buyers had to make less than $55,000 per year.

Anna was approved for $189,000 and purchased a home for $167,000. They only had to put down 3%. They ended up putting down even less. A US Bank program gave the couple an interest-free loan of $3,000 to use toward the downpayment that could be paid back after selling the house.

In the end, the couple only paid $2,010 of their own money towards the down payment. The couple and the sellers split closing costs. Because they used the American Dream Program, their interest rate was slightly higher at 4.25% than if they had not used the program, but even with the higher interest rate, it was less expensive than paying PMI.

Between the down payment, closing costs, and some other miscellaneous expenses, they spent between $4-5,000. The entire process took just about a month. The monthly payment including all expenses like taxes is $1,020.

While living in the home, they made $12-15,000 in DIY improvements and when they sold the house almost four years later, cleared $53,000!

The couple decided they wanted their next home to be a multi-family unit so they could live in one half and rent the other. They have the 20% down payment but may take advantage of some other programs available to home buyers.

Find Your Dream

Finding information on the program is not easy. When you click on the application link through the on-line HUD brochure, it comes back as page not found. The FHA site says the program ended in 2008.

“Elimination of Non-Profit Down Payment Assistance: On July 30, 2008, President Bush signed the Housing and Economic Recovery Act of 2008 which prohibits seller-funded DPA (Down Payment Assistance) for loans backed by the Federal Housing Administration.

Prior to this bill, the seller could contribute up to 6% to the buyer to cover either a down payment or closing costs on an FHA loan. The changes took effect on Oct. 1, 2008. We provide this information for reference only. These grants are no longer available.”

There are similar, sometimes identical state and local programs so it may be that the federal government turned the program over to the states some of whom still use the name The American Dream Program. Anna suggested asking your realtor and loan officer what programs are available as they will have localized knowledge.

Use the Stack Method

There are many programs available to those wanting to buy a home, and you can use some of them in conjunction. The stacking method is what Anna was able to do; she used the Dream Program and the program from US Bank together.

These are some other government programs to help people buy homes.

An FHA Loan

An FHA loan also allows buyers to get into a home with a down payment as little as 3.5%.The federal government guarantees the loans. If you default, the FHA will pay the lender so the bank loaning the money is taking on little risk which makes them more willing to lend to buyers they may otherwise have turned down.

There are no income limits, but you are required to have a reasonable debt to income ratio which is a fancy way of saying you make more than you spend every month. Those with less than perfect credit scores are eligible. You can have a score as low as 580 and still put down just 3.5%, and if you put down more, your score can even be below  580.

How much you can borrow depends on the home prices in your area. You can see the limits of your location at HUD’s website.

If you use an FHA loan, there are some fees. You pay a mortgage insurance premium of 1.75% and an additional small monthly fee. The insurance is what the FHA uses to pay the bank should you default.

USDA Guaranteed Rural Housing Loan

If you’re not a city person, you might want to consider buying in a rural area with a USDA loan. Americans are fleeing for the big city, and it means the small, rural towns they leave behind are dying. A shrinking tax base leaves the schools underfunded; small businesses don’t thrive, services like post offices and libraries close or have insufficient hours. To help combat these problems, the government offers zero down payment mortgages for eligible buyers willing to live in rural and suburban areas.

USDA

The USDA guarantees the mortgage, like the FHA program meaning buyers can get approved for a mortgage even without putting anything down.

The area and the size of the household determine the income limits. You can find the numbers in your area at the USDA map and table. The total monthly payment including the mortgage, interest, insurance, and taxes must be less than 29% of your monthly income (this is good, your home costs should not exceed 30% of your income).

If you have a credit score above 660, the program may allow for a higher percentage of total housing costs. Even those who have “thin” credit files, meaning no credit score, may qualify if they have good payment histories for things like rent and utilities.

The Federal Housing Authority sets maximum mortgage limits for FHA loans that vary by state and county. Also, like the FHA program, you will have to pay mortgage insurance.

VA Loan

If you are active duty military, a veteran, or a surviving spouse, the Department of Veteran’s Affairs has an excellent home buyer’s program. No down payment is required, and the VA guarantees part of the loan.

The program has no income limit, and borrowers should have sufficient “residual income,” the amount of money left over after paying all expenses each month. There is no minimum credit score or max borrowing limit, but the maximum amount the VA will guarantee is $424,100.

Buyers are not required to have PMI, and if they find themselves having trouble paying the mortgage, the VA will step in to negotiate with the lender.

If It Sounds Too Good To Be True

So what’s the catch? There is no catch.These are legitimate programs that help people who otherwise would not be able to buy a home or who would have to wait years and years to do so. It’s not only rich people who should get to be homeowners.

There can be some drawbacks though that you should keep in mind. The interest rates for buyers using these programs can be high and if it would only take an extra year or two (or just some additional spending cuts or side hustling) than it makes sense to wait and save up for the 20% down payment.

For FHA loans, the mortgage insurance premium and monthly fee can cost more than PMI would.

Don’t Rush In

It’s easy to become excited at the possibility of buying a home when you thought it was out of reach and it’s terrific that there are programs to help people buy homes. But run your numbers before making any decisions. If everything has to go exactly right for things to work out, now is not the time.

There are hidden costs to owning a home and a lot of responsibilities that you didn’t have as a renter. Make sure you’re aware of them and ready for them before you try to achieve the American Dream.

Show Notes

Skyspace: A Sour ale flavored with raspberry.

Pumpkin Spice Cider: An autumn ale for all the basic bitches.

American Dream Program: More information on the program.

Tool Box: All the best stuff to manage your money.

Simple Wealth: Research and evaluate rental properties.

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