Home ownership for cheap

Sean and I attended a preliminary workshop for buying a home through the Neighborhood Assistance Corporation of America, or NACA, today. The program offers people the chance to own their own home with no down payment, no application fee, no closing costs, and an interest rate 1% below current market rates. I'd mentioned to a few people that we were going to look into this, only to hear plenty of warnings that there had to be some sort of catch, something they weren't telling us. It did seem strange. How did they manage to swing that kind of deal? Would you be paying ridiculous amounts of money for your house for the rest of your life?

Actually, no. What they've done is rather clever. NACA, a nonprofit organization, is an advocacy group that has been trying to reveal how banks take advantage of people, and offer an alternative. They have managed to do the latter through a combination of lobbying the government and negotiating with individual financial institutions. If you look at their timeline, you'll see how they've gone to "war" with several well-known banks.

The nuts and bolts of the system they've negotiated is the root of the whole thing, and what convinced us that this isn't some sort of elaborate scam.

The main thing NACA does is get the bank to take care of the majority of your up-front fees, including the down payment and most of the closing costs. The bank also agrees to a base interest rate of 1% below the market rate for NACA members.

The savvy thing to do, and what NACA highly encourages, is to put money towards buying "points"--paying down your interest rate from the get-go. This is much easier to do if you don't have to make a down payment or pay lots of fees. Paying down your interest rate saves you an inordinate amount of money in the long term. Most people end up grossly "upside-down" on their houses by the time they reach the end of their mortgage; the representative said that most 30 year mortgage holders end up paying three times the purchase price due to interest. Knock down that interest rate at the beginning and you can curtail that kind of rampant spending. Or, in NACA verbiage,

The Interest Rate Buy-Down is a tremendous opportunity to increase the Maximum Purchase Price without increasing your Maximum Mortgage Payment. If you do not want to purchase a more expensive home, you can also use the buy-down to reduce your monthly mortgage payment. For each one percent (1%) of the mortgage amount--or "point"--you pay up front, the interest rate is reduced by one-quarter of a percent (.25%) for the life of the mortgage.

This unique option in the NACA program will increase the Maximum Purchase Price much more than using the same amount as a downpayment. You can use any source of funds to pay for the buy-down, including seller contributions, city grants and government programs, employers, unions, other programs, or your own savings.

NACA has apparently helped people get their interest rates down to as low as .5%. That's one half of a percent! Can you imagine that? :> We probably won't be that lucky. Sean estimates that we can get ours down to 2.5%, but we won't really know until we've gone through the application process.

Of course, you don't have to take the option of paying down your interest rate, but that's what Sean and I plan to do. You'd have to be an idiot not to, if you have some money to throw at it. (You can pay down your interest rate without going through NACA, but your average real estate agent isn't going to know how to negotiate this, and your average mortgage broker isn't going to want to do this.)

Now, you might be wondering how exactly this works for the bank. After all, they are trying to make a profit, and if you chop down the interest rate and force them to shoulder the up-front costs, they don't seem to make as much money. The benefit for the bank, though, is that people who go through NACA's program are far less likely to default on their loans, because they will have been educated by NACA in how to live on a budget. Another plus is that NACA members are typically in it for the long term; they truly want to own the home they are buying. The bank can therefore count on years and years of steady income, even if it is less than they could get in a higher risk situation. (A final reason that this is appealing to a bank is that it shows they are socially responsible, but as Mr. Christopher said, "How am I supposed to enter that into the ledger?")

The buyer covers the "pre-paids"/escrows, and the bank covers the rest as part of its deal with NACA--in other words, the other fees are negotiated into the mortgage. NACA works with you every step of the way, first getting you to work out a realistic budget, getting you approved for your loan, helping you find a house, and helping you pay the interest rate down if you choose to. A young couple came into the workshop today and gave testimonials that indicated the process was extremely easy, completely unlike most home purchasing horror stories.

One other important benefit of NACA is its "NSF", or Neighborhood Stabilization Fund. When you buy a house and borrow over 80% of its value, you are typically required by the lender to purchase Private Mortgage Insurance. This insurance does nothing for you--it just ensures that the lender will be paid if something happens and you can't make a payment. You, however, typically end up putting out a "For Sale" sign if that happens. With NACA, when something happens and you can't make a payment, you can meet with the NSF committee and plead your case, and if you're approved, NACA will dip into the NSF and make your payments for you until you're back on your feet. The NSF costs NACA members $50 a month for the first 5 to 10 years of their mortgage; PMI insurance can cost upwards of $200 a month. Both ensure that the lender gets paid, but the NSF also ensures that the homeowner gets to keep the house. You can apply for NSF benefits for as long as you own the home.

Here's a breakdown, taken from the Home Buyer's Workbook:

NACA Program Features

• No down payment
• No closing costs
• No fees
• No yield spread premium
• No pre-payment penalty
• No balloon payment
• No required credit life or other unnecessary and overpriced insurance
• one-on-one financial and credit counseling

NACA Program Fine Print

• No member of the household can have an ownership interest in any other property.
• You must occupy the home for as long as you have the mortgage through NACA.
• You must contribute to the NSF.
• You must participate in at least five "Actions and Activities" per year in support of NACA's mission.

For the Augusta region, which includes the priority areas of Richmond, Columbia, and Aiken counties and the city of Savannah, the maximum purchase price for a single family home is currently $172,632. Any NACA "Qualified Members" can purchase homes in the priority areas, and those with "low and moderate income" can purchase in additional areas.

So far, this thing seems to be a very good deal. We'll be meeting with the coordinator on September 22 to discuss the matter further. Hopefully this will mean we can save a lot of money and get a really nice house. We'd have to pay off our house before using it as a rental property (unless we wanted to rent out a room while we were still living in it), but that's not a big deal to us right now.

As a nonprofit organization, NACA doesn't have much money to spend on advertising, which is why you may not have heard of it. NACA depends on its members to spread the word, via postcards, flyers, word of mouth, anything. I figure this nice mention on my website should count towards one of the five advocacy activities we're required to do per year as members of the program. ;>