Take advantage of CHFA mortgage programs to buy a home with only $1,000 cash
Seriously, you can buy a house for almost nothing out of pocket. It's like 2006 called and wants its housing bubble back. Well, that's not quite true. The Connecticut Housing Finance Authority (CHFA) offers attractive loans to first-time buyers (and those who haven't owned a home in the last three years) who qualify based on income and purchase price limits. The program does a great job releasing those trapped in the endless loop of being unable to save for a down payment due to high rents. It gives them the opportunity to own a home or condo and begin building equity rather than paying their landlord's mortgage.
CHFA income limits vary by town, but no town has a limit lower than $89,700 for 1-2 person family or $103,155 for a family of three or more. The purchase price limits also vary by town. Burlington's limit is $336,950 for example, but in Newtown it's $574,020. This accounts for median home prices and cost of living.
Purchase price limits usually don't come into play unless you have a lot of savings for a big down-payment, have little-to-no debt or are close to the maximum income limit. For most buyers, debt-to-income ratios will usually limit your purchase price by virtue of limiting the size of the mortgage you can qualify for. The guidelines used by most lenders allow a total debt-to-income ratio of no more than 41% and it assumes a housing payment-to-income ratio of 31%.
There are two huge advantages to a CHFA loan. Even if you can qualify for a conventional mortgage, a CHFA loan can be better.
- Interest rates are lower than conventional mortgage rates. At the time of writing this, the CHFA interest rate is 2.875% versus 3.500% for a conventional loan. Over the life of a $300,000 loan, that's nearly $37,000 saved. Alternatively, the lower the interest rate the higher the mortgage you can qualify for, so you can buy a nicer home with the same monthly payment.
- Less than no money down. CHFA loans up to 96.5% of the purchase price. Down-payment assistance will cover the other 3.5% plus closing costs that are typically paid out of pocket on a conventional mortgage.
Using CHFA's affordability calculator:
- $60,000 per year income for a single purchaser
- $266/month auto loan payment ($15k Debt at 2.5% interest 5 year term)
- $280/month student loan payment ($25k Debt @6.8% interest 10 year term)
- $4100 property tax / $600 homeowners insurance + $1680 PMI
- 2.875% interest, 30 year mortgage
Qualified purchase amount: $218,000 with no down payment or cash out of pocket for closing costs. The same buyer with an annual income of $72,000 would qualify for a purchase price of almost $275,000. Again, with no money for a down payment or closing costs.
The best part about CHFA loans is the down-payment assistance program (DAP). Not only will DAP cover the 3.5% down-payment, but also loan up to 5% additional for closing costs, meaning that it's possible to buy a house without any money out of pocket except for the inspection and appraisal. The total out of pocket expenses: ~$500 for inspections + ~$500 appraisal fee = $1000
Pro Tip: pay for everything with cash or debit card prior to seeking mortgage pre-approval and throughout the purchasing process. Monthly credit card expenses count as rotating DEBT! Avoiding credit card usage makes a HUGE difference.
Pro Tip: when negotiating based upon inspections, lean toward the homeowner fixing problems or paying for a warranty program rather than credits to closing costs. With 100% CLTV the purchaser will NOT receive closing credits as cash, but rather it will reduce the mortgage amount of the down-payment assistance program.
What's the catch?
CHFA requires that buyers take a 3-hour home ownership course prior to closing or an 8-hour pre-purchase course for section 8 buyers. Course information can be found here. Both are free and discuss home ownership and personal finances. Besides that, as long as you meet the income and purchase price limits, the process isn't any different than attaining a regular mortgage.
Although CHFA has no minimum credit score requirement, because most buyers are putting less than 20% down, PMI (private mortgage insurance) is needed and may require a certain credit score. Speaking to a CHFA-approved Participating Lender is your best bet. Pat Macomber with CT Home Mortgage is affiliated with Berkshire Hathaway and in my Avon office, so he is a good resource to answer questions.