Chapter Eight: Buying Real Estate
- Pros and Cons
- Banking Terms
- Primary Costs
- Finance Options
- Commercial Mortgage
- Line of Credit
- Mixed-Use Space
- Locating Financing
- Tips for Easier Financing
- Residential Mortgage Assistance
- Residential Down Payment Assistance
- Commercial Property Assistance
- Nonprofit and Small Business Assistance
- Mortgage Insurance
- Defaulting on Your Mortgage
Whether you are an individual, collective or nonprofit arts organization, do not write off purchasing a space as unrealistic. Owning your own space is an important option to consider, as it will provide you with security, stability and a financial foothold in an ever-changing real estate market.
Disclaimer: Some parts of this chapter include information about the law, but the City of Seattle and constributors to this manual do not guarantee that all information is complete and up-to-date. This information is not intended to be a substitute for legal advice that applies to your specific situation. See Chapter 4 for information on hiring a lawyer.
This chapter examines:
- Costs associated with purchasing a space;
- Financing logistics;
- Borrowing from lending institutions and others;
- Tips to make financing easier; and
- Consequences of failing to pay your mortgage.
If you are serious about purchasing, then read this chapter carefully: It gives you the tools to navigate the purchasing process and to make an informed decision that best fits your needs and resources.
Pros and Cons
Whether you need a live/work or work-only space, gallery space, or a performing space there are many reasons to consider purchasing. Property ownership often requires a significant commitment of time, effort and cash, but for most people the rewards justify the investment. Reasons you might consider buying include:
- Stability of Tenure: You won't have to move just because the landlord sells the property or raises the rent so high that you are forced to relocate.
- Professional Freedom: You are the master of your space. You can work as you wish, whenever you wish, and do what you wish with the space, as long as you follow applicable zoning laws and building codes.
- Financial Investment: Historically, real estate has been a sound financial investment, especially over the long term. There are peaks and valleys, as with any investment, but if you are not forced to sell at the wrong time, you will see a financial return, build up financial equity in the property, and reduce your mortgage debt. Property, as an asset, should increase your borrowing power, as lenders view property owners as less of a financial risk. As a property owner, you can also deduct a portion of the mortgage interest and real estate taxes you have paid on your Federal Income Tax Returns.
However, ownership is not for everyone, and there are risks. Ownership issues to consider:
- Decline in Property Value: There is no guarantee that your property's value will increase. Depending on where you purchase, it might even decrease.
- Maintenance: Routine maintenance is a necessary evil of property ownership. Besides the daily requirements of caring for your space, you also need to be prepared for the inevitable replacement of big-ticket items such as the roof and windows.
- Reduced Flexibility: It's not as easy to take off for a 12-month residency or go abroad for extended periods of time when your mortgage payments are due and you must address property maintenance needs. Trying to sell too quickly means that you might not maximize the property's value. A large mortgage payment could also make it difficult to put money towards other important investments such as additional art-related expenses, savings plans, health insurance and vacations.
Some key words you will need to know for this chapter include:
- Amortization: The elimination of mortgage debt through regular payments over a specific length of time. Payments must be large enough to cover both principal and interest.
- Debt Ratio: A comparison between your total assets (gross income, money in the bank, equity in property, etc.) and total debts (credit cards, student loans, car loans, etc.).
- Deed: The legal document that transfers title of the property to the buyer.
- Earnest Money: The funds you (the buyer) deposit with the seller to indicate serious interest in purchasing the space.
- Escrow: An account set up for you by the lender that holds funds for your insurance and property taxes until payment is required. The lender typically makes the payments for these expenses from this account.
- Equity: This represents the difference between what you owe on the property (the mortgage) and what the property is actually worth. For example, five years after you purchase a home for $115,000, the property's value increases to $125,000, but you still owe $75,000 on your mortgage. The difference between the value of the property and the mortgage amount you owe is $50,000 ($125,000 - $75,000). So, you have $50,000 in equity in the property.
- Interest Rate: The amount of money you are charged for using the lender's money to purchase the property. Based on the risk of the loan and prevailing market rates.
- Lien: A legal claim against the property. Liens are used to secure loans, and must be paid first if the building is sold. Other types of liens that may be put on your property include property taxes, from the Internal Revenue Service, court-ordered, etc.
- Mortgage: A type of loan specifically used to finance the purchase of real estate. Several types are available.
- Mortgagee: The bank, credit union or other financial institution that loans you money to purchase real estate property.
- Mortgagor: The borrower who accepts the loan from the lender (i.e., you).
- Principal: The original amount of money you borrow for the mortgage. Does not include your interest rate.
- Term: The length of time the borrower has to pay back the principal with interest. Depending on type of loan, the longest mortgage term for residential properties is typically 30 years.
- Title: The legal document that denotes ownership of real estate.
Purchasers-to-be must consider the financial costs involved. This section examines the primary costs associated with purchasing and owning a space, in addition to the mortgage loan.
Lenders usually require potential buyers of residential or commercial property to make a down payment -- i.e., contribute funds, normally in cash, toward the purchase. The lender feels more secure giving a loan to a buyer when s/he has invested some of his or her own money in the property.
The remaining balance of the purchase price is usually paid through a mortgage or another form of loan. It is often beneficial to make as large a down payment as possible; the larger the down payment, the smaller the loan you have to take out, which translates into a lower monthly mortgage payment.
With a conventional loan for residential property, lenders typically ask you to put at least 5-10% of the property's value down; some may require as much as 20%, or as little as 3-5%. Some require no down payment. Some loans and nonprofit programs partially cover or help you to reduce the down payment.
Lenders are more cautious in dealing with commercial real estate, and will often require a down payment of as much as 30% of the property's value. In addition, lenders are not as lenient with commercial requirements, and will likely not reduce the down payment amount. If you cannot afford the down payment for a commercial space, buying a residential space is fine as long as your work is conducive to living and working in a residential area and conforms to the zoning regulations.
If you are buying for the first time, and will live in the space, you might be able to use funds from your retirement savings plans (for example, an Individual Retirement Account) or employer sponsored savings program/401k. Review your plan's terms of repayment, and look for penalties and fees associated with accessing these funds. Your accountant will also be able to advise you on possibly leveraging your current assets or borrowing to come up with the down payment.
Down payment gift assistance programs can cover the cost of the down payment and closing costs. Unfortunately, these programs are almost always limited to residential purchases.
Other funding options: Making legal arrangements to borrow money from family or friends; timing lump sum payments from work to add them to your down
payment; and loan products that accept this type of gift assistance.
In addition to the down payment are "closing costs," the amount of which varies depending on the lender and type of financing you choose.
The most common fees are:
- Attorney fees
- Credit report
- Phase I Environmental Report, which tells you how the property has been used. Typically required for commercial spaces only.
- Homeowner's insurance
- Mortgage insurance
- Property appraisal
- Title search and insurance
- Up-front interest
- Bank recording fees
The Real Estate Settlement Procedures Act (RESPA) requires that you receive certain types of information on closing costs, the relationship between professionals, etc. throughout the purchasing process, and outlaws kickbacks. The Act covers 1-4 unit family residential properties.
Make sure your lender discusses closing costs you will be expected to pay, and provides you with an estimate, before you decide to purchase a specific property or use a certain type of mortgage.
Property Taxes and Insurance
Property taxes, homeowner's insurance and private mortgage insurance (if applicable) are other costs involved with owning a space. Your lender might require, or you might choose, to have these additional costs included in your monthly mortgage payment. While this allows for easier budgeting, it also increases your monthly payments by several hundred dollars or more. In cases where you put down less than a 20% down payment, your lender might require you to include these costs in your monthly mortgage payment.
If you get paid in lump sums throughout the year, setting aside a portion of your payments to pay these costs separately might be easier than including them in your monthly mortgage payment. Additional information on types of mortgage insurance is provided later in this chapter.
If you put down less than a 20% down payment, you lender will require you to have private mortgage insurance (PMI), which protects the lender in the event you default on the loan.
Unless you can purchase the property outright, you will need a loan or mortgage to cover the remaining balance. The most common method for financing a real estate purchase is through a residential or commercial mortgage. Nonprofit organizations can fundraise in order to acquire the necessary monies.
A mortgage is the most common way to finance a residential property. A financial institution (the mortgagee) lends money to you (the mortgagor) for a specific period of time (the term). You are responsible for paying off both the principal (the original amount you borrow) and the agreed-upon interest (the extra amount of money you agree to pay) on this loan over a specified period of time (the amortization).
The interest rate you receive on your loan is influenced by a number of factors, including:
- Term of the mortgage loan (length of time you pay it back).
- Whether the interest rate is fixed for the life of the loan or is adjustable.
- The level of risk the investor perceives you to be, based on your credit history.
When you purchase your property, the lender's mortgage is officially recorded on the title to protect the lender's interest. If you run into financial difficulty and must sell the property, the lender will be paid off from the proceeds of the sale before you or any other creditors receive any funds. The only other authority that would be paid before the lender is the municipality (King County) or the federal government. After you pay off the mortgage, remove the lender's name as soon as possible from the property title and replace it with your own.
You have several options for obtaining a mortgage, including traditional lending institutions such as banks, trust companies, credit unions and savings and loans. You can also work with a mortgage broker. Check with your accountant or lawyer, as they may know of other sources of funds. Shop around for a mortgage, as interest rates and loan products vary from institution to institution.
Many conventional lenders will give you a first mortgage valued at up to 95% of the appraised value of the property on a residential mortgage. In these cases, you would only need a 5% down payment. In cases where you do not have the money to cover the remainder of the purchase price, there are three ways you can obtain these funds:
- Secure a second mortgage to cover the remaining balance. The interest rate on this second mortgage is typically higher because it is considered to be riskier.
- Apply for a high-ratio mortgage, also known as an insured mortgage, which will cover as much as 100% or more of the property's appraised value. You will not have to come up with a down payment. Because the lender assumes greater risk through this mortgage, the interest rate is typically higher, and you will have to pay insurance premiums.
- Receive a grant from a down payment assistance program.
For additional information on mortgage loans, review Chapter 9: Types of Mortgages.
Applying for and obtaining a commercial mortgage takes more time than a residential one -- sometimes weeks longer. Even if you are applying to a lending institution familiar with you, your business or your organization, expect the process to be more complicated.
Lenders consider commercial mortgages riskier than residential ones. One major issue is that the secondary market for commercial mortgages is almost nonexistent. The secondary money market is comprised of the U.S. government (Fannie Mae or Freddie Mac), as well as other companies and organizations that specialize in purchasing mortgages from the original lender.
This secondary money market is very large for residential mortgages, and allows lenders to make loans they otherwise would not. Lenders make these loans because the probability that they will be bought is very high. Because the vast majority of lenders will own a commercial mortgage for the life of its term, they are more stringent in their approval processes.
Commercial mortgages typically carry a higher interest rate and have shorter terms. The maximum term you can expect for a conventional commercial mortgage is 15 years, but five- to 10-year terms are more common. In addition, lenders usually only lend between 70-80% of the appraised value of the property, and rarely compromise on the down payment requirements, which can range between 20% or more.
The U.S. Small Business Administration and other organizations provide commercial mortgages that require smaller down payments, have longer terms and may provide more than 80% financing. These programs often have more restrictions placed on the mortgage, and are usually only available for small businesses and nonprofit organizations. Each lender has its own guidelines.
If you are serious about purchasing a commercial property, research the types of loans available. Many lenders customize commercial loans specifically to fit the borrower's needs, and have in-house programs and deals that are not readily advertised. These types of loans are known as portfolio loans.
Have a qualified accountant look over your finances, business plan and financial statements. Ask for feedback, confirm your financial viability to repay the loan, and get your paperwork in order to apply for the loan. If you do this before approaching the bank, you will be better-prepared and the approval process should progress more smoothly.
When you apply for a loan, the lender will want you and any other purchasers to complete full credit applications, detailing both your personal and business assets. If you are purchasing as a business or nonprofit, you will be asked for:
- Your business plan and/or nonprofit charter.
- Financial statements for the past 2-3 years that include your assets, liabilities and collateral.
- At least three years of tax returns; and
- Projected income and expenses for the life of the loan, or, at minimum, the next 2-3 years.
The bank will review all this material and assess the nature of the risk that they would take by lending to you, your business or organization. In addition, the bank will run a personal credit history on the person(s) applying for the loan and/or any others who will guarantee the loan. The amount of money you are offered, and the interest rate, will reflect this assessment.
All business partners and owners (especially start-ups) might be required to provide full personal guarantees of the loan. If the company cannot pay the mortgage, the lenders are coming to you personally to make good on the loan. This may also be the case for the board members and executive director of a newly formed nonprofit.
Nonprofits and businesses must apply for a commercial mortgage, even when they seek to purchase a residential property.
Buying a commercial property is a significant financial investment and requires more patience on your part. If the first lender turns you down, keep trying.
Line of Credit
A line of credit is a type of loan that allows you to borrow a predetermined amount of money from your lending institution whenever you want, throughout the loan's term. When you establish a line of credit, the lending institution will give you a credit limit, which is the maximum amount you can borrow at any one time. As long as you have not reached your limit, you can keep borrowing money from the loan as you wish.
As with any other loan, the total amount on your line of credit and the interest rate you are charged is determined by your needs, the assets and collateral you have, and the lender's assessment of you as a credit risk. It pays to shop around for a line of credit, as interest rates vary between lenders. Generally, the interest rate will be based upon the current prime rate (the best rate you can get) plus an additional percentage. The percentage you are charged will reflect your personal financial position as evaluated by the lender and the collateral you offer.
Lines of credit are typically used by self-employed workers, businesses and nonprofits as a means to help with cash flow problems. They are meant to finance short-term financial hiccups, not long term goals.
For example, if your grant is a couple of months late, a line of credit will allow you to pay the organization's operating expenses, rent, employees
and other financial obligations until the grant comes through. Or, say it will be few weeks before you are paid for a commission, and you need an
influx of funds immediately to cover your expenses. In both scenarios, you pay down the loan when you receive your payments.
Although not common, a line of credit can be used to purchase property. This can be a risky endeavor. Many lines of credit have extremely short terms compared to the 15- and 30-year terms you can obtain with a mortgage. Some even require your loan to be reevaluated on an annual basis, which may lead to problems if your line is revoked or the maximum limit reduced and you are forced to come up with a large sum of money immediately.
If you pursue this method of financing, thoroughly evaluate your ability to make the payments. Also, assess the terms and conditions of the loan so you can find the one that best fits your needs and financial capabilities.
We will not cover in detail the ins and outs of fundraising in this manual. But if you are a nonprofit organization, we encourage you to explore fundraising when seeking to purchase your own space. Many arts organizations have successfully managed a capital campaign to purchase space. Speaking you're your colleagues who have experience with capital campaigns may provide valuable information to you.
The Donors Forum and the Foundation Center provide many resources on grants and other strategies for fundraising. Organizations such as The Shunpike offer assistance with fundraising. Additionally the University of Washington offers a certificate program in fundraising.
In mortgage terms, mixed-use space is defined as property used for both residential and commercial purposes. The building's physical elements, use and zoning are all factors in determining whether you qualify for a commercial or residential mortgage.
If you haven't realized it yet, residential mortgages are easier to obtain and easier on the pocket than commercial mortgages. Obtaining a residential loan for an unusual living space is ideal.
This doesn't mean that if you purchase a three flat and rent out a unit that you will be charged for a commercial space just because you are making a profit renting a unit. In this scenario, despite your profit motives, the building is still being used for residential purposes. However, it does mean that if you purchase a storefront building and use the storefront as an extension of your residential space, or as your residential space only, you might be able to secure a residential loan rather than a commercial one. This also includes if you use your storefront space for a personal work space, such as a home-based studio.
Why? In either instance the use of the space is still primarily for residential and personal purposes; business activities (i.e. store or office hours, etc.) are not taking place on the premises. However, if you were to take the same storefront property, live in an upstairs residential unit and run a commercial art gallery, dance studio, art-based business, or nonprofit out of the storefront space, then you will more than likely need a commercial mortgage.
If you are concerned that you can't afford a mixed-use space, don't be. Just make sure that when you start looking to purchase a mixed-use space, you discuss your needs, wants and options with your lender early in the conversation. If possible, find a lender or broker who is familiar with the financing issues associated with mixed-use space.
Much of what determines the type of loan you can get depends on two things:
- How much of the space is dedicated to commercial vs. residential uses; and
- Whether or not the space meets Fannie Mae's guidelines for residential space use in order to qualify for a residential mortgage.
Lenders are more willing to finance residential mortgages than commercial ones, because they can sell residential mortgages to the secondary market. Fannie Mae and Freddie Mac are the government-sponsored investors that purchase the majority of these loans. For lenders to sell residential loans to either organization, they must follow specific guidelines. Simply put, Fannie Mae and Freddie Mac have the last word.
Fannie Mae sets the following guidelines for mixed-use properties to qualify for a residential mortgage:
Although we (Fannie Mae) will purchase or securitize mortgages that are secured by properties that have a business use in addition to their residential use-such as a property with space set aside for a day care facility, a beauty or barber shop, a doctor's office, a small neighborhood grocery or specialty store, etc.-we have special eligibility criteria for them. Therefore, the appraiser must provide an adequate description of the mixed-use characteristics of the subject property in the appraisal report and the lender must make sure that it considers these criteria and adequately addresses them.
Specifically, for a mixed-use property to be acceptable, the following criteria must be met:
- The property must be a one-family dwelling that the borrower occupies as a principal residence.
- The mixed use of the property must represent a legal, permissible use of the property under the local zoning requirements.
- The borrower must be both the owner and the operator of the business.
- The property must be primarily residential in nature.
- The market value of the property must be primarily a function of its residential characteristics, rather than of the business use or any special business-use modifications that were made.
For more information about Fannie Mae's guidelines:
- Single family properties: https://www.efanniemae.com/sf/guides/ssg/index.jsp
- Multifamily properties: https://www.efanniemae.com/mf/guidesforms/
What does this mean to you? It means that, when you begin to seek a loan for a mixed-use property, the type of financing you are able to secure, how much money you will need to put down, and length of time you have to pay off the loan will all come down to the property's use and its adherence to Fannie Mae's guidelines.
Ready to buy? You can either pay cash, or use the services of traditional financial institutions or a mortgage broker.
Traditional Financial Institutions
Start your search for financing with your current bank, trust company or credit union. They will be familiar with you, your banking history, and the nature of your business or organization. Find out what they can do for you, then shop around!
The banking business is highly competitive. You might obtain financing on better terms, or at better rates, with a different institution. You can always go back to your own institution with a better quote and ask them to match it.
By nature, traditional lending institutions are risk-averse. They often seek personal guarantees for every dollar they lend, and have strict guidelines for loan approval. Depending on your financial situation, securing a loan from a traditional financial institution might be more difficult. If this is the case, you may want to consider using a mortgage broker.
If your financial institution won't lend you money, or cannot give you as much as you need, do not despair. A mortgage broker might be able to help you. Mortgage brokers act as go-betweens in arranging mortgages for you with lenders. In Washington, mortgage brokers are regulated by the Washington State Department of Financial Institutions. http://dfi.wa.gov/cs/mortgage-apply-license.htm.
Brokers assess the risk you pose and match you up with lenders who can tolerate that risk. They have access to banks, lending institutions and private investors -- but not all lenders. They can only place loans with those lenders with whom they have preexisting contractual relationships. Working with a broker can be more beneficial than working with a lending institution because a lender can only provide you loan products offered by their organization.
Recently, mortgage brokerage services have become available on-line. Ditech,E-Loan and The Lending Tree are examples of on-line mortgage brokers that bid out your loan to
lenders and give you a response in record time. Lenders pay these companies to be linked to their Websites, so the number of providers might be
limited. In addition, lenders might be from different states and unfamiliar with the Seattle area real estate market. Access to customer service and
other assistance could be problematic.
As with any other professional advisor, use a trustworthy mortgage broker. Family and friends, or your attorney, account or real estate agent can be good resources for referrals, if they have had positive experiences with a particular broker. The Washington State Department of Financial Institutions has a list of mortgage brokers licensed to practice in Washington on its Website.
Do some of your own homework on current interest rates to ensure that your broker has given you a fair deal. Compare the loan packages being offered by various brokers.
If your mortgage broker arranges financing from a financial institution, the broker's fee might be paid by the lending institution or included in your loan as additional points. However, should the broker secure funding from an alternate funding source, you might have to pay the fee. Discuss fees at your first meeting with a mortgage broker to know exactly what charges you may or may not incur, and how the broker will be paid.
A broker might propose to have part or all of his/her fee paid by the lender through a yield spread premium (YSP). Beware of these, as they are actually funded by an increase in your interest rate. Say you qualify for a loan at 5%, but the broker encourages you to take a loan at 6.5% that has lower down-payment and closing costs. The lender pays the broker for getting you to take the higher loan; that payment is the YSP. Your broker must disclose this arrangement to you.
Pay the YSP only after you understand how it works and what it will cost you in interest and monthly payments in the long run. It might be cheaper to pay a broker fee up front. The following is a link for more information on YSP: http://www.bankrate.com/brm/news/mortgages/20030717a2.asp
Tips for Easier Financing
After reading the first part of this chapter, you might be feeling overwhelmed and discouraged about financing a property. Don't be: You can prepare yourself for the purchasing process by reading this manual and locating resources to assist you. This section offers tips on making purchasing and financing easier.
First-Time Home Buyers
Many programs such as First-time Homebuyers (FHA) loans are geared toward first time homebuyers. Plan on completing the paperwork and requirements before you start looking at properties, as they can take several weeks.
Some mortgage programs offer lower down payments and other advantages to homebuyers. In order to access some of these programs, you might be required to attend a Homebuyer Counseling program, which will cover financial responsibilities of buying a home, credit repair issues and budgeting. Even if counseling is not a requirement for the loan you choose, you might benefit from the experience. .
Low and Moderate Income Earners
As with first-time buyers, many programs also serve low- and moderate-income earners; many artists fit into this category. Begin your search for these types of programs in Residential Mortgage Assistance. These programs may take several weeks or months, so complete the program before you start looking at properties.
Arrange for a "pre-approved mortgage" before you start looking for a property. Pre-approval means exactly that: The lender has reviewed your credit-worthiness and agreed to provide you with financing for a certain amount at an approximate interest rate. Because interest changes on a daily basis, the lender will typically lock-in a rate for you after you've put in a contract on a property. A pre-approved mortgage offer is usually valid for 90 days while you look for a space.
Pre-approval has another benefit: When you find a property, you can make a firm offer to purchase, rather than an offer conditional upon your ability to arrange financing. In a competitive market, especially for affordable live/work space, this will be an advantage. Note, however, that the lender reserves the right to approve the actual property before a final agreement is reached.
As you look for financing, beware of predatory loans, which usually have many hidden clauses and penalties, high interest rates and points, etc. These loans ultimately serve to defraud you out of your property. For additional information, contact the City of Seattle Office of Housing for information regarding predatory lending: http://www.seattle.gov/housing/predatorylending/
TIP: Secure your financing before you go looking. This allows you to target your search within your price range and make a firm offer when negotiating. Your real estate professional should be able to help you secure financing.
Residential Mortgage Assistance
If you find it difficult to meet the strict guidelines to qualify for a conventional mortgage, remember that there are many alternatives and programs to assist you in purchasing a space. These special programs offer advantages to eligible buyers, such as lower down payments, lower closing costs, higher income-to-debt ratios and more.
Some of these programs may have income requirements and limits on the purchase price or loan amount. Others require you to participate in home buying workshops, credit counseling or other program-specific requirements. Some programs will finance multi-family and mixed-use buildings, while others may apply to certain areas of the city. In addition to government programs, many community groups and nonprofit organizations also offer financing assistance.
If you are serious about owning your own space, then looking into assistance programs will give you more choices and greater flexibility. It pays to do your homework and thoroughly understand your options. You might be able to combine some programs with an approved down payment assistance program (explained in detail in the next section). Depending on your needs and your desired use of the space, other resources can assist you with rehabbing or developing a space. Also, check out the resources in Chapter 21: Rehabbing Your Space and Chapter 26: Developing a Facility.
Residential Down Payment Assistance
A down payment gift assistance program helps potential homebuyers by providing a down payment. The seller gives money to a nonprofit organization, which manages a down payment gift assistance program. This "gift" is usually in the form of a discount in the home's purchase price. The organization then gives an amount of money equal to the seller's gift to the buyer when the loan closes. The gift is treated as a down payment, and can range from 1-7% of the purchase price or can be a flat amount.
For example, if the seller gives a gift of $2,500 to the organization, the organization will give the buyer about $2,400 towards the down payment. The other $100 is used by the organization to cover administrative fees. The nonprofit must act as a middleman, because lenders do not allow sellers to give down payment money directly to buyers. Under the rules governing FHA loans, borrowers can accept down-payment money from charities.
About these types of programs, the U.S. Department of Housing and Urban Development (HUD) states the following: "HUD does not approve of 'gift'
programs administered by charitable organizations and, thus, will not offer a formal approval . . ."
Mortgage lenders are responsible for assuring that the gift to the homebuyer from the charitable organization meets the instructions described in HUD Handbook 4155.1 REV-4, CHG-1 Paragraph 2-10(C) (e.g., no repayment implied, etc.). Charitable organizations that comply with existing regulations and policy guidelines are permitted to give cash gifts to eligible homebuyers and do not need prior FHA approval to do so.
If you are considering an assistance grant, ensure you are not caught at the table on closing day without the proper funds, or end up paying more for a property than it is worth:
- Do research on the organization administering the grant. Avoid companies with questionable financial backgrounds or histories of financial instability.
- Make sure the program provider belongs to the Homeownership Alliance of Nonprofit Down payment Providers (HAND), comprised of many down payment assistance charities. HAND sets standards of ethics and conduct within the industry to protect homebuyers and lenders. Most HGPA member organizations also follow the HUD guidelines for assistance programs.
- Make sure the real estate agent or mortgage broker is not receiving kickbacks for enrolling people in the program. For example, a real estate agent or broker who insists that you only work with a particular program could be a red flag. Real estate agents and mortgage brokers must disclose to you if they are receiving money for a referral.
- Make sure that the seller does not raise the cost of the home after they agree to reduce the cost by participating in the program.
- Ask your lender about loans that qualify for any down payment assistance grants, and make sure the grant the lender suggests follows HUD's guidelines.
U.S. Department of Housing and Urban Development (HUD) Report on Down Payment Assistance Programs: http://www.hud.gov/offices/hsg/comp/rpts/dpassist/conmenu.cfm
Commercial Property Assistance
So a residential space won't work for your needs, but you feel like you can't afford a commercial property? Again, don't fret: A commercial property might not be completely out of your reach. Check with the community development organizations and chambers of commerce in the communities in which you want to purchase.
Many lenders customize loan packages for commercial mortgages, and don't always advertise specific programs. Investigate as many banks and other lending institutions as possible. Also, check with smaller community banks and lending institutions located in the neighborhoods that interest you; they might have less stringent requirements than larger lending institutions, or programs targeted specifically to their immediate surroundings. Resources for developing commercial spaces are often relegated for small businesses and nonprofit organizations looking for space.
Nonprofit and Small Business Assistance
Various programs assist nonprofits and small businesses with financing. Check with organizations and lenders with whom you have preexisting relationships, who can direct you to other funders and lenders; and community development organizations and chambers of commerce in the communities in which you want to purchase, who might know which lending institutions and organizations have a special interest in the area.
Smaller community banks and lending institutions located in the neighborhoods that interest you often have less stringent requirements than larger lending institutions. They might offer programs targeted specifically to their immediate community surroundings.
If you plan to rehab or develop a space, check out the resource sections of Chapter 21: Rehabbing Your Space and Chapter 26: Developing a Facility for funding sources. Each program has different requirements for participation.
As you begin the purchasing process, you might realize that you need or want several types of policies to adequately protect your property. This section discusses basic types of insurance policies available to cover and/or pay off mortgage loans. For a more in-depth explanation of how the insurance process works, review Chapter 19: Insurance.
When you take out a mortgage, your lender will require you to maintain homeowner's or hazard insurance for the term and (at least) the amount of the loan. This type of policy protects your property against loss due to fire and other hazards. Homeowner's is for residential spaces, while hazard is for commercial and industrial properties.
If your mortgage is $150,000, you must have at least $150,000 in insurance coverage. It is advisable, however, to obtain enough coverage to replace
your property and its contents.
If your lender requires (or allows) an escrow account, your homeowner's insurance will be paid from this account by the lender throughout the loan term. Many times the insurance premium for the first year must be paid in full prior to the closing.
Although the insurance payment may be included in your monthly mortgage payments, you are responsible for securing insurance and making sure the coverage is adequate. You can change your insurance company as many times as you like, so long as the policy covers the mortgage.
Some homeowner's or hazard policies might not protect your artwork and equipment, home-based studio or business. Read policies carefully and ask about options for additional coverage or if a separate policy is required.
Accidental Death and Dismemberment
This policy may pay all or a portion of your mortgage if your death, or loss of limb or sight is the result of an accident.
This type of policy will cover scheduled mortgage payments in the event you are unable to make payments due to illness or injury. Fully understand the terms of these policies before purchasing them; many provide coverage for only 1-3 years.
This type of policy protects your property against floods, but is only required in flood plains. While Seattle is not in a flood plain, there are portions of King County that are located in the flood plain. Here is a link to flood plain maps as well as other helpful information: http://www.kingcounty.gov/environment/waterandland/flooding/maps.aspx. You might want to discuss obtaining flood insurance if you are purchasing in a community that has a history of flooding. This insurance covers rising water associated with flooding, not water issues related to sewage problems, burst pipes from freezing, etc.
Mortgage Life Insurance
This type of policy will pay off the entire amount or a portion of the debt remaining on the property mortgage in the event of your death. You might be able to obtain a better deal with a standard life insurance policy instead of a mortgage life policy.
Private Mortgage Insurance (PMI)
Also known as PMI, lenders require this insurance if you put less than a 20% down payment on the property. This insurance protects the lender in the event that you default on the loan and the property goes into foreclosure. This policy typically is required for residential purchases.
Title insurance protects against claims made by people who believe they have an ownership right to the property. While these claims are usually discovered during the title search, there is no guarantee that all claims will be uncovered. The lender will purchase this insurance to protect its interest in the property. Consider this type of policy if you have concerns about the title (for example, because you purchased the property through foreclosure or at auction).
This type of policy, typically for residential properties, protects you against defects in the property that arise post-closing. If the property is new, the builder will usually carry a one-year warranty that fully insures you against defects. You can purchase policies that extend this warranty for up to 10 years.
Although this insurance often applies to new constructions only, ask your lender or insurer if it is available in your area for pre-owned homes and/or those that have been rehabbed.
Defaulting on Your Mortgage
Your mortgage contract will clearly outline the consequences should you default on your loan. Default is usually associated with failure to make your mortgage payments. While this is the most frequent cause of default, other common causes include:
- Failure to pay property taxes;
- Failure to insure or sufficiently insure the property;
- Failure to obey local, state or federal law as it relates to the premises;
- Deliberately damaging the property that secures the mortgage; and
- Leaving the property vacant for an extended period of time (i.e. abandonment).
If you encounter financial difficulty and cannot make your mortgage payments, speak to your lender immediately. If this is a short-term situation, perhaps due to illness or cash-flow problems, some lenders may waive payments for a short period or allow you to make partial payments. Alternatively, the lender may suggest that you defer the debt and make new payment arrangements. This usually will entail lengthening your mortgage by the number of months you were unable to make the full payments.
If these solutions are inappropriate or unacceptable to the lender, seek the advice of your lawyer immediately. Other options may be available to you, such as selling the property to pay off the mortgage loan and any outstanding payments. In addition, if you have a residential mortgage, contact the City of Seattle's Office of Housing Foreclosure Home Ownership Preservation Program at http://www.seattle.gov/housing/buying/ForeclosurePrevention.htm or (206) 684-3340.
What is Foreclosure?
If you default on your loan, the lender exercises the rights contained in the mortgage agreement to seize your property and sell it. This process is known as foreclosure, and requires approval by the court.
Washington State has two types of foreclosure:
- Judicial Foreclosure: The judicial process of foreclosure, which involves filing a lawsuit to obtain a court order to foreclose, is used when no power of sale is present in the mortgage or deed of trust. Generally, after the court declares a foreclosure, the property will be auctioned off to the highest bidder.
- Non-Judicial Foreclosure: The non-judicial process of foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A "power of sale" clause is the clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of default. In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by the lender or their representative, typically referred to as the trustee. Regulations for this type of foreclosure process are outlined below in the "Power of Sale Foreclosure Guidelines".
Power of Sale Foreclosure Guidelines
DISCLAIMER: This section provides information about the law, but the City of Seattle and contributors to this manual do not guarantee that the information is complete and up-to-date. You should consult an attorney for legal advice applicable to your specific situation. For information and resources on hiring an attorney, see Chapter 4.
If the deed of trust or mortgage contains a power of sale clause and specifies the time, place and terms of sale, then the specified procedure must be followed. Otherwise, the non-judicial power of sale foreclosure is carried out as follows:
- The notice of sale must be transmitted both by regular mail and by certified mail, return receipt requested, to the borrower at their last known address, and by regular mail to the attorney of record for the borrower, if any, not less than thirty (30) days prior to the day of sale.
- The sheriff must publish a notice of the sale once a week, consecutively, for four (4) weeks, in any daily or weekly legal newspaper of general circulation published in the county in which the property is located. Additionally, the sheriff must also post the notice in two public places, one of which must be the courthouse door, in the county where the sale is to take place for a period of not less than four weeks prior to the day of sale.
- Said notice must contain the time and place of the foreclosure sale, the names of the parties to the deed, the date of the deed, recording information, a property description, the terms of the sale, and the borrowers rights (or lack of) redemption.
- The borrower has up to eleven (11) days before the sale stop the foreclosure process by paying the past due payments, plus expenses, including trustee and attorney fees.
- The sale must be made by auction between 9:00 am in the morning and 4:00 am in the afternoon at the courthouse door on Friday unless Friday is a legal holiday and then the sale must be held on the next following regular business day. The sale may not be conducted less than 190 days from the date of default and the highest bidder will receive a certificate of sale.
- The sheriff may postpone the sale (not exceeding one (1) week next after the day appointed) by giving notice and by posting written notices of the adjournment under the notices of sale originally posted.
Unless redemption rights have been precluded, the borrower may, within eight (8) months after the date of the sale, redeem the property by paying the amount of the highest bid at the foreclosure, plus interest.
If the non-judicial foreclosure process is used by the lender, then it cannot sue for a deficiency judgment. On judicial foreclosure sales, the borrower can be sued for a deficiency, unless the property is found to be abandoned for six (6) months before the decree of foreclosure.
For more information on Washington State Foreclosure laws visit:http://mrsc.org/
Nonprofit organization that offers gift assistance programs to buyers of single-family homes valued up to $322,700, and multi-family homes up to $620,500.
America's leading nonprofit real estate developer for the arts. Creates, fosters and preserves affordable space for artists and arts organizations.
Association for Enterprise Opportunity
National organization of micro enterprise lenders, whose membership provides micro loans to small businesses.
Provides home buyers with assistance through a private gift trust fund.
Dream Maker Program
Sponsored by International Housing Programs. Helps cash-strapped buyers with free gift money for down payments and closing costs.
Requires the seller to pay the amount of the gift plus 7.5 percent, based on the sales price of the house after settlement. Buyers must be approved by lenders who allow gift assistance.
Golden Feather Realty
Specializes in the management and disposition of single-family homes.
Habitat for Humanity
Provides no-interest mortgages to qualified individuals who can make a $1,000 down payment and invest a required number of sweat-equity hours in building their spaces.
Sponsored by the New Home Gallery, this is a traditional down payment assistance program.
Homes for All Program
No geographic restrictions or limits on buyers' income or assets. As with other gift assistance programs, the home buyer does not repay the funds, and the seller pays in the amount of the gift plus a processing fee.
Jewish Council on Community Affairs
Provides loans for affordable housing and economic development projects.
Local Initiatives Support Group (LISC)
Provides loans for the development of affordable housing and facilities.
Location Efficient Mortgage (LEM)
A mortgage that helps people become homeowners in location-efficient communities.
Lumity a Nonprofit Resource Service
Consulting group that catalyzes the nonprofit community to do more good work by increasing the capacity of charitable organizations to more effectively fulfill their missions.
NAREB Housing America Fund
ATruCharitySM down payment assistance gift fund program that complies with FHA guidelines.
National Community Capital Association
Invests in small businesses, quality affordable housing, and vital community services that benefit economically disadvantaged people and communities.
National Congress for Community Economic Development
An organization of more than 700 community development corporations and groups that participate in community development activities, including lending.
National Equity Fund, Inc.
Provides loans for affordable housing development.
National Federation of Community Development Credit Unions
Dedicated to community development.
One of the oldest organizations offering down payment gift assistance to home buyers. Rules and restrictions are similar to other down payment gift programs. Follows HUD's guidelines.
Neighborhood Assistance Corporation of America (NACA)
A nonprofit organization that provides loans to low- and moderate-income people and sub-prime borrowers. Also provides workshops on homeownership and credit counseling.
Neighborhood Gold Down payment Assistance Program
Provider of down payment assistance grants from The Buyer's Fund. Its grants can be used on any home, and with conventional or sub-prime loans.
Nonprofit Finance Fund
Serves nonprofit organizations through financing and advisory services.
Purchasing Space: Information from ArtistLink
From the Massachusetts based Website. Some informative pages about purchasing your own space.
A nonprofit that collects the gift amount from sellers plus a 7.5 percent fee that goes into a pool of funds from which gifts are paid.
Self Help Credit Union
A community development lender that has provided over $3.9 billion in financing to individual, under-served home buyers, small businesses and nonprofits nationwide.
Seniors Real Estate Specialists
These real estate agents have received special training to assist seniors in finding spaces that meet their unique lifestyle choices, housing issues and needs.
Teacher Next Door Program (TND)
Designed to further the goals of HUD by encouraging teachers to buy homes in low- and moderate-income neighborhoods.
U.S. Department of Housing and Urban Development (HUD)
Creates, rehabilitates and maintains the nation's affordable housing, enforces the nation's fair-housing laws, helps the homeless, and helps local communities meet their development needs.
U.S. Small Business Administration
Free resources and advice for starting and growing a small business.
Women's Self-Employment Project
Provides micro loans to women-owned businesses, as well as professional development workshops. Also provides free assistance with tax preparation.