- “Silent second mortgage:” This is a loan that is given to the borrower that provides three quarters of their 20 percent down payment, thus avoiding the need for mortgage insurance. The buyer would have a traditional first mortgage that would equal 80 percent of the purchase price. The silent second mortgage would be 15 percent of the purchase price. That would leave the remaining down payment requirement of five percent. During the life of the second mortgage, no payments are required at all. However, once the property is sold or transferred, payment of the loan with accrued interest is due.
- Closing cost assistance loan: This is available to a qualified buyer to help cover the costs associated with buying a home, commonly known as closing costs. A buyer may get a loan to cover closing costs for up to four percent of the purchase price, or a cap of either $10,000 or $15,000, depending on income . No payment is required on this loan while the buyer owns the property. If the buyer is still occupying and owning the home at the six-year mark, this loan and all the accrued interest on that loan, is forgiven. If the buyer sells within six years, the principal and all accrued interest must be paid.
- Mortgage Credit Certificate: This is a federal income tax credit of either 15 percent or 20 percent of the annual mortgage interest paid on the buyer’s mortgage. This is different than a tax deduction. It is actually in addition to the interest tax deduction that a homeowner traditionally receives.
So let’s look at how these programs combine to make a great buying opportunity. John has not owned a home for five years. He has met with us to confirm his buying ability and his qualifications for the SDHC First-Time Homebuyer programs.
First-Time Homebuyer Case Study
John is 69 years old. He knows that under the housing commission definition, a first-time buyer is anyone who hasn’t owned a home in the past three years.. He is definitely interested in finding out more about those first-time buyer opportunities. He has just been pre-approved for a home purchase and recently went into escrow on a new home in Spring Valley for a purchase price of $300,000.
- John will get a loan for 80 percent of the purchase price, or $240,000 at the current market rate of 4.5 percent.That payment will be $1211/mo.
- John will have a silent second from the SDHC totaling 15 percent of the purchase price, or $45,000. Interest will accrue on this loan at a rate of three percent per annum. However no payment is ever due as long as John owns and occupies the home. Once his home sells, all principal, plus interest, is then due and payable from the sales proceeds. Monthly payment on the silent second = $0/mo.
- John is also eligible for a loan to cover his closing costs up to $10,000. SDHC will give him this money at a cost of five percent per annum. If John sells or transfers the property within six years, all of the principal and accrued interest will have to be repaid. If he is in the home beyond six years, then the loan is forgiven entirely. Additionally, no monthly payment is due as long as John lives in and owns the home. Monthly payment for closing costs = $0/mo.
- Mortgage Credit Certificate: John also qualifies for a 15 percent tax credit based upon his income and a home purchase in a “non-targeted” census tract in San Diego. That means that he will have a reduction in his tax obligation equal to 15 percent of the total amount of mortgage interest he pays in a given year.
Here is what John’s purchase looks like:
- Purchase price = $300,000
- 1st mortgage of $240,000 at 4.5 percent = $900/mo interest plus $311/mo principal, or $1,211/mo
- 2nd mortgage of $45,000 at 3 percent but payments are deferred = $0/mo
- Closing cost assistance of $10,000 at 5 percent but payments are deferred = $0/mo
- Property taxes per month = $312/mo
- Homeowner’s insurance = $50/mo
- TOTAL HOUSE PAYMENT = $1,573/mo
- Plus, at end of each year, John will have a tax credit, a reduction in his tax obligation. In the first year, that is equal to $1,620 ($900/mo interest times 12 months times 15 percent).
So the moral of the story: John will save a total of $1,350 in interest payments on the deferred second mortgage, $500 on the closing cost assistance loan and $1,620 on the mortgage credit certificate, a total of $3,470 annually.
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