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Thread: Housing rehab program eligibility requirements

  1. #1
    Cyburbian SGB's avatar
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    Housing rehab program eligibility requirements

    The scenario:
    Our muni has a housing rehab grant and loan program for owner-occupied single family residences. Maximum grant amount of $20K; max loan is $5K.

    Our eligibility requirements for this program are:
    • Location: must be in one of our two target areas
    • Income eligibility: Household at or below 80% of the MHI for our MSA
    • Property Condition: must be considered substandard by our definitions, and brought up to at least Section 8 HQS after rehab
    • Property value limitations: After rehab value myust not excell ethe FHA 203b mortgage amound for the area and type of property.

    The situation:
    A property we just approved for participation this summer with work recently completed is being foreclosed on by the mortgage lender. An auto finance company also wants a piece of the owner for another unpaid loan.

    The questions:
    1. Should we consider adding a minimum acceptable credit score as an eligibility requirement? (Just because a household is LMI does not necessarily mean bad credit history.) Or,
    2. Should I just accept that !@#$ happens, and wait to see if other recipients follow suit before making changes?
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  2. #2
    Cyburbian mike gurnee's avatar
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    It happens. Is the "grant" actually a forgivable loan, where the owner must live in the unit a number of years after rehab? If so, you are in the lending business and should discuss the matter with the lein holders. I would not ask for or use credit ratings, but would check on leins before forking over money. A bad credit rating may reflect medical bills or a free-spending ex-spouse.

  3. #3
    Cyburbian SGB's avatar
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    Quote Originally posted by mike gurnee
    Is the "grant" actually a forgivable loan, where the owner must live in the unit a number of years after rehab?
    It is indeed a forgivable loan that requires the recipients live in the home for 5 years.
    I would not ask for or use credit ratings, but would check on leins before forking over money. A bad credit rating may reflect medical bills or a free-spending ex-spouse.
    Slow or no payments on current loans don't always result in liens.

    Is there a downside to using a credit report/score, and giving the applicants an opportunity to address/explain blemishes?
    All these years the people said he’s actin’ like a kid.
    He did not know he could not fly, so he did.
    - - Guy Clark, "The Cape"

  4. #4
    Cyburbian michiganplanner's avatar
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    Quote Originally posted by SGB
    Is there a downside to using a credit report/score, and giving the applicants an opportunity to address/explain blemishes?
    Well, discrimination issues immediately come to mind. Secondly, defending against critics who say that you are not in the mortgage lending business and lack the proper training to assess credit reports even with an LOX (Letter of explanation). (I used to do residential lending).

    We have had and continue to have similiar situations here. I am confident that if we added a credit requirement that I would be able to accurately and fairly asses potential borrowers, but I am not sure about others in the dept.

    When it comes to protecting your investment, make sure that you record a mortgage against the property yourself and make sure it is done properly. Never, or only reluctantly subordinate your loan/grant to another entity.

    I think that regardless of credit, if you had a borrowers existing mortgage balance so you could determine how much equity you had to "play" with so that if a foreclosure occur, the balances of the mortgage company and your loan were atleast 80% or less of the market value of the property then you would be ok - for the most part. You might not be made whole when the property is sold at auction or sheriff's sale, but you could recoup a little of the investment. But it takes recording the right items against the property.

    Oh yeah, forget about the auto company. They don't really have a leg to stand on.
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  5. #5
    Cyburbian Cardinal's avatar
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    I have managed housing rehabilitation programs and have often observed that one of the biggest problems faced by applicants was a lack of sound financial management skills. Our program was set up as a loan with no interest or repayment requirement, however, the loan was required to be repaid when the house was sold. We would get frequent requests to subordinate to refinancing, and began requiring a statement from the owner as to why they wanted to refinance. Some were because of a lower interest rate, others were to allow the owner to conduct more home improvement, but over half were to pay off debts like credit cards.

    In revamping the program a few years ago we began to require a credit report and would typically look at how much equity the owner had in the home. Of course, our policy of taking a mortgage on the home (which would have priority over other debts, except for a first mortgage) protected our interests. For some applicants, we required that they take a credit/financial management class as a condition of receiving the loan.
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  6. #6
    Cyburbian
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    I assume you already do this, but we require proof of ontime mortgage payment at time of the (forgivable) loan closing. . .

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