As mortgage lenders continue to restrict their lending guidelines in response to the "subprime fallout" it is no wonder that mortgage originators are increasing their reliance on FHA & state sponsored first time home buyer programs to fill the void.
In Oregon we have the Oregon Bond program (http://www.oregonbond.us/). This particular program is offered through the Oregon Housing and Community Department and is funded through tax-exempt mortgage revenue bonds.
On the surface, the Oregon Bond program appears to be the "end all, be all" program for ANY first time home buyer. However, it is my goal with this blog post to inform you of the positive and negative aspects of this loan option.
Pro's:
*Low/ No down payment requirement- The Oregon Bond program has two down payment options for first-time home buyers. The first option called the "Rate Advantage" has a lower interest rate and carries a minimum down payment requirement of 3%. The second option called the "Cash Advantage" requires 0% down on the part of the home buyer. However, at the time of this posting the Cash Advantage program was temporarily suspended.
*Interest Rate- The Oregon Bond Program has a very attractive interest rate. At the time of this blog posting a borrower could lock in a 30 year fixed rate @ 5.75% for the Rate Advantage option. This is about .375% less than a comparable FHA option.
*Flexible credit approval- Like the FHA loan program the Oregon Bond loan can be fairly flexible in terms of an applicants credit score. Unlike conventional loans there are not adverse rate adjustments for applicants with lower credit scores.
Con's:
*Mortgage Insurance: The Oregon Bond loan program carries fairly expensive mortgage insurance requirements. Just like the FHA loan the mortgage insurance is structured with a 1.50% upfront mortgage insurance premium that gets financed into the loan plus a .50% monthly premium that is built into the monthly payment. For example, a $200,000 loan would get financed @ $203,000 to fund a $3,000 mortgage insurance policy at closing plus $83.33 per month.
*Recapture Provision: This provision is often overlooked by borrowers and loan originators but it can be a costly oversight. With an Oregon bond loan the home buyer may be subject to a recapture tax when the home is sold in the future. For a detailed explanation of this provision I would encourage you to research it at the Oregon Bond website. I will do my best to explain it here. The recapture tax is collected at a rate as high as 6.25% of the original loan amount if the home is sold within the first 9 years of the loan at a higher price than it was initially purchased for if the loan holder's income exceeds a certain threshold (currently about $70,000) at the time of sale. For example, a home buyer takes a loan out for $200,000 today to buy a home for $225,000. In 5 years, they decide to sell their home. At that time they sell their home for $275,000. If their household income at that time exceeds the threshold (determined at that time) then they would owe $12,500 (6.25% of $200,000) in recapture tax, even if they had refinanced during the course of owning the home.
*Inflexible guidelines: Although the Oregon Bond program is flexible in some degree (mostly credit and down payment) it is considered to be inflexible in other areas. For example, the program requires a 2-year work history in the same industry and school does not count. for many home buyers they have only been out of school for less than 2 years. These borrowers would not qualify for an Oregon Bond program but may qualify for FHA loans. Furthermore, there is a very limited set of Oregon Bond lenders to choose from. Therefore, an Oregon Bond application is subject to the underwriting tendencies of a few different lenders. This differs greatly from FHA where we can originate almost anywhere.
*Income limits: Unlike the FHA loan program the Oregon Bond loan program REQUIRES that an applicant be a first time home buyer (defined as not having owned in the previous 3 years) & may not have a household income that exceeds a certain level (depending on the county that the property is in). For the Portland-Metro area the income threshold is about $70,000 at the time of this post.
*Processing: Oregon Bond programs have to be reviewed by the lender and the state of Oregon. Typically speaking the process for getting an Oregon Bond loan is much more cumbersome and time consuming than a traditional FHA loan. We like to ask for 45-60 days to get an Oregon bond loan done whereas we can do FHA loans in a much shorter time frame.
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7 comments:
I'm about to face this recapture fee, and I'm trying to figure out if the income limits used to determine whether I owe this fee are (a) those provided to me at the time of the loan, or (b) those in place at the time of sale. Information on the Oregon Bond website are not specific on this point. Your post suggests that the answer is (b)--they use the income limits at the time of sale. If so that's good news--if the answer is (a) I will have to pay over $3,000, if it's (b) I'm off the hook.
Oregon Bond Just lost its mortgage insurer and the cash advantage hasn’t been available for a long time.
Now it’s only good up to 80% so borrowers might be better off with a standard FHA or Rural Loan program.
Tyler @ Arbor Mortgage Group
Excellent blog post. I realize it came about a year ago but I figured I'd add two more "Cons" to the Oregon Bond program.
1) OB loans are unavailable for mortgage assistance of any kind. They aren't backed by freddie or fannie and as such...no refinance assistance or payment assistance for you.
2) Can't rent your property out even if you're having trouble keeping up with your payments. Even if renting at a loss they still have the power to make your loan due if they find out.
I think the OBL program needs some reform in these current economic times to help its participants. First time homebuyers are getting hit worse anyway.
Is that really true regarding that they will make your loan due if they find out you are renting? I talked to someone at the State of Oregon months ago and asked them about renting out my home and that I'm a bond program member. They said that due to the current economic environment that they were letting people rent but this was not written anywhere. I'm trying to find out if it is written that they will make your load due. Robert.
I found this out recently regarding the Oregon Bond Program....you would be allowed to rent out the property if you have lived in the home for at least one year. This is a recent change, mainly because of the economy and we are finding that borrowers needing to relocate for employment but cannot afford two mortgage payments. We have told our servicers not to monitor the property for owner occupancy after the first year.
@Bobby - who did you talk to about this? I'd like to follow up and see if they have something in writing that they're not reviewing properties for owner-occupancy after 1 year. It would be terrible if someone took your advice and then found out that the person you talked to didn't know what they were talking about.
I'm not sure why anyone would follow the advice of someone they don't know without researching every option.
First, start with the Oregon Department of Housing and Community Services and ask them specific questions if you are an Oregon Bond Program member.
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