Do You Qualify for the Good Neighbor Next Door Mortgage Program?

April 28, 2014

This post was written by Chris Hardenberger (NMLS #515568) from Westerra Credit Union. If you'd like to write a guest post for The Dime Colorado, email us at dimecontact@copera.org.

There is a little known mortgage program called the Good Neighbor Next Door  which allows some public servants to purchase a home and only pay one-half the purchase price.  If you are a teacher, firefighter, EMT or law enforcement officer, this information is for you.

Who can participate?

Teachers: If you are employed as a full-time teacher by a state-accredited public or private school that teaches children pre-K through 12th grade.  The school must serve students from the area where the home you are purchasing is located.

Firefighter/EMT: If you are employed full-time by a fire department or emergency medical services responder unit of the federal, state, local or tribal government serving the area where the home is located.

Law Enforcement: If you are employed full-time by a law enforcement agency of the federal, state, local or tribal government. You must be sworn in to uphold the law and make arrests for violations.

You must certify that your good faith intention is to remain in your occupation for one year after buying the home and you must maintain the home as your primary residence for at least three years. Applicants (and any joint applicants) must not have owned a property in the previous 12 months.  Participants are required to certify every year that they are living in the property.

Where are the eligible homes?

The eligible single family homes are in revitalization areas. Homes from those areas are selected by the US Department of Housing and Urban Development (HUD) to list exclusively within the Good Neighbor Next Door program.  All eligible participants must apply for a home within the area that they serve.

How does it work?

The first step is to find a mortgage lender and get pre-qualified for the loan. You may choose an FHA loan, VA loan, USDA loan or a conventional loan.  Because a mortgage is one of the largest debts that you will ever incur, it is important to do your research and make sure that you are getting the best available loan product. Ask about the Good Neighbor Next Door program specifically and see what options they offer.

Step two is to check hudhomestore and find an eligible home in your area. Be patient, and check often. There may be only a few homes listed, but the list is updated weekly. Once you find a home you are interested in, follow the instructions on the website to submit your interest.  You must have financing for the full amount of the sale before placing a bid, although you will only be making payments on half. If more than one bid is submitted, there will be a lottery to determine which applicant may purchase the home.

Step three is the fun part. Let’s say you have the opportunity to purchase a home for $200,000. Your first mortgage will be for $100,000 (half of the purchase price). At closing, you will also sign a second mortgage for $100,000. The second mortgage is called a silent second and requires no payment.  It will be forgiven as long as you live in the home for at least three years.

Which mortgage will work for me?

There are a few options for financing a Good Neighbor Next Door property.  FHA 203k is a loan product that allows you to borrow an additional 10% (up to $35,000) of the total purchase value for repairs, remodeling, and/or upgrades. This option will typically require borrowers to pay a Mortgage Insurance Premium (MIP). FHA homeowners typically pay an upfront MIP at the time of closing, plus an ongoing monthly premium. MIP is paid by the borrower, but the lender is the beneficiary. The coverage protects lenders against default by the borrower.

U.S. Department of Agriculture (USDA) has offered rural development loans for a Good Neighbor Next Door program. This is for homebuyers who are willing to relocate in rural areas and do not need funds to improve the property.  The USDA does this to encourage growth in rural parts of the country. The loans are for 30 years, and there is no required down payment.  This program will go up to 100%. USDA also requires an upfront MIP at the time of closing, plus an ongoing monthly premium.

How much will it cost?

To begin with, you must use a Realtor and pay a Realtor fee.  If you are looking at a $200,000 home and negotiate a 6% rate with your Realtor, the fee would normally be $12,000. However, when taking advantage of the Good Neighbor Next Door program, you will only pay the fee on the amount of the first mortgage, bringing the fee down to $6000. The commission rate varies from one realtor to another and is negotiable, so do your research before signing with a real estate agent.

The required earnest money is 1% of the listing price or a minimum of $500 and a maximum of $2000. This money will be considered as part of your down payment for the home. The appraisal is paid in full by HUD. Closing costs can also vary from lender to lender based on the property, the price, and the location. A $200,000 purchase in Denver will likely cost $2000-$3000 in closing costs. These costs are normally divided between the buyer and the seller. However, when purchasing through HUD, the buyer is responsible for all the fees.

Finally, your lender may require an escrow deposit and that amount will vary based on the annual cost of property taxes and home owners insurance.

If you meet the qualifications for the Good Neighbor Next Door program, now is a great time to begin monitoring hudhomestore on a weekly basis to find a property in your area.