Buying on a budget out of reach for some after state program cut

Tanya Jones, a 32-year-old state government employee, found a house this spring that she thought she could afford.

The 1,000-square-foot home, built in 1912, has two bedrooms, one bathroom and a yard for her two dogs, and is about 20 minutes from where she works in Olympia.

She was pleased when her mortgage lender told her she qualified for a 40-year loan with a fixed 6 percent interest rate that would cost her $950 a month.

The day before her home inspection, however, her lender delivered some bad news: Her financing had fallen through. But it wasn't because Jones had made sudden or foolish financial moves that hurt her credit or otherwise damaged what lenders would call her loan "approvability."

Instead, the state's House Key loan program through which she'd qualified to borrow had hit trouble and has been temporarily cut back.

Jones is not alone. Others also saw their homebuying hopes dashed when House Key closed the door on them this spring.

But there are plenty of other programs out there designed to help people of modest means buy a home. (See accompanying list.)

What happened to the House Key program? It relies on tax-exempt bond funds and, due to limits on bond issuance set by federal and state guidelines and an unusually large demand from other state agencies for the bond funds, the state's housing finance commission had to temporarily rein in the program.

As a result, House Key revised its lending criteria to serve a smaller, lower-income pool of loan applicants — those earning 80 percent or less of an area's median income.

House Key calculates those levels as $41,700 for a one-person household and $59,600 for a four-person household in both King County and Snohomish County. Come September, the organization told mortgage lenders, funds would likely be available again for a wider population of borrowers, which would include Jones.

In Thurston County, where Jones works, the new House Key income limit for a one-person household is $37,050.

"I make good money," Jones said, but added: "Now homeownership seems like an experience that's a little out of my reach."

The curtailment of such funds for first-time buyers at the launch of the summer buying season is one sign that first-time or middle-income buyers may face a challenging market in coming months.

Lending rules used for some first-time or lower-income buyers are growing stricter, the inventory of starter homes is tightening and home prices in the area are continuing to rise.

"I think it's going to be harder than usual this summer for these buyers," said Lynda Myrick, a mortgage-lending consultant at First Horizon Home Loans in Seattle who had six clients who were in the process of purchasing homes through the House Key program.

Of course, there are still many options for first-time buyers, including FHA and VA loans, interest-only loans, conventional loans (with higher rates) and 40-year loans.

However, Myrick said lenders in general are showing signs of returning to stricter lending criteria — and that may make shopping increasingly hard for first-time buyers.

"In some ways, though, it seems lenders are going back to the old-school math."

By that, Myrick said, she's referring to the percentage limit of total debt to gross monthly income that lenders will generally approve.

In the past, she said, lenders didn't want to loan to a borrower whose total debt (including housing costs) would account for more than 36 percent of total monthly income.

In recent years that limit adjusted up to the current 45 to 50 percent range as lenders got increasingly creative — some say lenient — about packaging mortgages for buyers. Some lenders make loans to borrowers at the 65 percent level — and that, Myrick said, is a loan type that will likely vanish.

Will first-time and middle-income buyers increasingly sit out the market?

"That's hard to answer," Myrick said. "There are two issues: There's the payment comfort level of the borrower and the question of approvability from the lender."

Some borrowers may be willing to take on interest-only or higher-interest loans in order to secure a home and cross their fingers that their incomes will either rise or they'll have refinancing options later.

Others may find that the terms under which they can buy are not attractive enough to warrant an offer.

Jones said she was still able to qualify for a loan but with terms far less attractive than her initial House Key deal.

Under a conventional 30-year loan, she'd have to pay about $300 more per month than the initial $950 monthly mortgage payment under House Key.

That's due to the shorter loan term, a higher mortgage interest rate of 6.25 to 6.75 percent, and the necessity of paying for the private mortgage insurance (PMI) required for buyers making a down payment of less than 20 percent of a home's asking price.

Jones said the additional $300 she'd have to pay per month included about $80 to $100 in PMI fees.

The higher cost of the conventional loan, coupled with the list of necessary repairs identified during the home inspection, made her decide to back out of the purchase.

"The combination was too expensive," Jones said.

Jones said she may not end up buying for another year. That's a sentiment Myrick has heard from others.

"I have six people who can't afford homes anymore," Myrick said.

Mia Vermillion, a senior loan consultant at Countrywide Home Loans in Federal Way, said she is considering advising some first-time buyer clients who were shut out of House Key to wait until September rather than buy on terms she can offer under other loan programs.

"A lot of my buyers were just shut out," she said.

Jeff Caden, executive director of the Washington Homeownership Center, a nonprofit educational organization that helps low-income and middle-income buyers prepare for homeownership, said there are two areas where his organization works to help buyers. The first is to provide "gap financing" for those who have some borrowing credentials (good credit, employment), but not enough money for a down payment.

The second is to advance construction of affordable housing in Puget Sound.

During March the center began offering what it calls the Hope Counselor Program, in which counselors help buyers examine their options for homeownership.

"I can't say it's not hard, because it is," Caden said.