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 and state-sponsored first time home buyer programs to fill the void.
In Oregon we have the Oregon Bond Program. 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.
Positive Aspects of the Oregon Bond Program:
- 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 applicant’s credit score. Unlike conventional loans, there are not adverse rate adjustments for applicants with lower credit scores.
Negative Aspects of the Oregon Bond Program:
- 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) and 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.