Buyers Beware!

Home ownership is one of the cornerstones of the "American Dream". We all assume we have acquired several benefits when we buy our own home, not the least of which are the ability to realize a profit if we sell at some time in the future, and, the ability to manage the property to the benefit of our families. Some first time buyers are financing their homes with loans that severely restrict their property "rights". These restrictions are often not disclosed to the buyers up front. If the buyers do not read the entire set of loan documents at closing they may not become aware of their loss of rights until it is too late.

All CHFA loans and all the first time buyer programs we are aware of that are subsidized by bond issues contain restrictive clauses.

The clause that may affect the profit a person could realize is found in the CHFA manual on page -iv-5- paragraph e as follows:

E. "Recapture" tax-federal law

All loans originated since January 1, 1991, are subject to a special Federal recapture tax provision. Borrowers may be subject to a recapture tax [by IRS] of up to 6.25% [subject to some adjustments that may reduce the tax to zero] of the loan amount or 50% of the borrower's equity, whichever is less, if the property is resold within nine [9] years of the date of recordation.

Page -v-5- paragraph e. contains this additional restriction.

E. Owner - occupancy

Borrowers seeking CHFA financing must occupy the financed residence as their principal residence, continuously, for the term of the loan or until sold, and must do so within 60 days of loan closing. Upon discovery of the situation wherein the property financed by CHFA is rented out by the CHFA borrower, CHFA will require the lender to immediately notify the borrower to correct the situation. Failure on the borrower's part to re-occupy will result in a non-monetary default foreclosure action and possibly other legal action.

We were recently contacted by some people who were planning to sell their existing home and use the profit as a down payment on a larger home. When they contacted their existing lender they were informed that they would only be eligible for 60% of the profit. The other 40% would be sacrificed because they had not lived in the property for the full nine years. The result was they were not able to move even though their family had grown and they needed more space.

The second restriction can be even more devastating. It has been said, "the only thing for sure is change". We cannot predict our future with certainty. If, after financing our home with one of these bond subsidized programs, we were presented with an opportunity or a situation that required us to move to another city or state, and the real estate market and interest rates were unfavorable, we could be faced with the dilemma of not being able to sell our property at full value and not being able to rent it out and move anyway.

The best way to make money in real estate is to buy property and keep it. These bond supported loan programs are an example of good intentions gone awry. The above-mentioned clauses can severely restrict our ability to manage and dispose of our property as we see fit.

Be careful, the slightly lower interest rates offered with some of these mortgages may not be worth it.

Compliments of Cencal Mortgage - 805/238-5626