ADFA keeps delivering on homeowner dreams

May 2-8, 2011

We had an opportunity to sit down recently with Murray Harding of the Arkansas Development Finance Authority and learn more about some of the state’s home loan programs.
The purpose of ADFA’s Single Family Housing Division is to supplement the private sector with the ability to provide safe, sound, and sanitary housing to as many low and moderate-income households in Arkansas as possible. The Authority does this through the sale of tax-exempt mortgage revenue bonds, thus lowering the interest rate that participating lending institutions are able to offer qualified homebuyers. Today, banks and mortgage companies all across the state participate in the programs.

Thanks for your time Murray, where would you like to begin?
“Let’s start with our “Home to Own Program,” which is typically referred to as the Bond Program. A first-time homebuyer takes out a first mortgage. The term is 30 years and it can be FHA, VA or Rural Development (RD). The maximum purchase price is $225,000 and the income limits are based on county where property is located and the number in household.

“The program has been around a long time. I was amazed when I first started, in 2005, at how high the income limits were, limits which are set by HUD and the IRS. We have no flexibility, or very little flexibility in exceeding those limits. So, gross household income cannot exceed those published income limits.
“For Pulaski County, in a small household of one or two people, gross household income cannot exceed $63,000. For a large household, three or more, it jumps up to $73,000. So a lot of people qualify.

“The purchase price limit is $225,000; again, for a low to moderate income program that may seem a little high, but we have some income limits in certain counties in Arkansas that go up to the mid-eighties, so, they’ll usual qualify for a $200,000-plus mortgage. But our average loan is about $95,000.”

“What about for those people who need help making a down payment?”

“Well with a Rural Devel-opment loan you borrow 100 percent, that’s why it’s so popular. But for the communities where RD is no longer available, our program will help pick up some of that slack because we offer essentially 100 percent financing. On an FHA loan for the first mortgage, they require a 3.5 percent down payment, and, of course, coming up with that 3.5 percent, that’s tough for a lot of low to moderate income households. So, that’s where our two forms of down payment assistance come in. One, we just call our DPA and it’s from $1,000 up to $6,000, available for down payment and closing costs.
“If they’re under the in-come limit enough, they might be able to be approved for the “American Dream Down Payment Initiative,” some people call it ADDI. There’s more money available, it’s 6 percent of the purchase price not to exceed $10,000. But the income limits for the ADDI are considerably lower than the others. For a small household under the Home to Own Program, $63,000, two people. Two people under ADDI, it drops to $37,000, a huge difference.

“And that’s household in-come. Anybody that’s 18 years of age or older who is living in the house, we have to count their income. Whereas the lender on a regular program just might say he or she is the only person on the note and count their income.”
“There’s a five year affordability period on the ADDI program. If you sell it within the first 60 months, you might have to pay what’s called a “recapture tax.” But there has to be proceeds available in order to take it out of closing. If you don’t sell it for a profit, they don’t take recapture.

And the good thing about the ADDI program, one, it’s a soft second, so there’s no second mortgage monthly payment, which helps you on your qualifying ratios for the loan.
And the ADDI is a forgivable loan. If you stay on a property five years or longer, whatever ADDI funds you borrow are totally forgiven. So, that’s by far the best product we have to offer. But again, that’s available to fewer people because of the lower income.”

Talk a bit more about re-capture tax.
“That was an issue that was always used against our program. If you sold the house in the first nine years, you might have to pay a recapture tax. And the lenders and Realtors, whenever somebody mentioned “bond program,” they’d throw up their hands and run for the woods because they didn’t want you to do a bond program because of that tax, because you don’t know what your situation is going to be nine years down the road. So, that was the biggest thing used against our program. And, so, we looked at it – and other states had done this same thing – we looked at it as a risk versus reward situation. Let’s take a little risk but hopefully it would open up our program to more people.

In October of 2008, we decided that for any reservations after that date, we would reimburse anybody that had had to pay the recapture tax. We just made it a non-issue. And it’s helped, I mean, when you tell people there’s no recapture – that’s the one thing old lenders and old Realtors remember about the bond program is that recapture tax.”
They’re still going to have to pay it but you guys will write them a check?
“They show us that they’ve had to pay the tax and we will reimburse them for what they pay.”

That’s made a big difference?
“It has. But we’ve made some other changes too. We’ve done away with the one percent discount point, so our loan is the same price as any other loan from any other investor. We really just take the place of an investor; we’re a new investor for these lenders. They don’t keep the loans, they sell them to somebody, generally, with the exception of Bank of America and Wells Fargo.”

How does the MCC program work?
“The Mortgage Credit Certificate was started at the same time that the bond program was, back in the mid-80s. But Arkansas chose not to participate. One reason was because it was a lot more expensive for our agency than the bond program. We work on what’s called volume cap, and, on the bond program, it’s a dollar for dollar worth of volume cap, whereas, on the MCC program, it costs you four dollars of volume cap for one dollar of loan amount. So, it’s four times more expensive than the bond program.
“We had a limited volume cap available and because the bond program was going so well we really didn’t need the MCC.

When the downturn hit in ’08, that’s when we really started looking hard at this because we had a lot of excess volume cap and this was something to fill in with. It has the same qualifying requirements as the bond program – first time homebuyer status, median income limits, and the $225,000 purchase price limit.

“But that’s where the similarities end. The MCC is an incentive for a first time homebuyer to buy a house. Because for a buyer that qualifies, they can receive up to a $2,000 federal tax credit every year as long as that house is their primary residence. So, if somebody stayed in a house 10 or 15 years, it would be a huge federal tax benefit for them. So, again, it’s an incentive to buy a house for a first time homebuyer.”
These are some great programs for people to look into. Thanks for your time Murray.
“My pleasure.”