Credit repair and creative financing enable first time home purchase

Mortgage broker: Sheila Perez, Holmgren & Associates.

Property type: Single-family home in Oakland.

Purchase price: $881,000. Loan: 30-year fixed rate. Rate: 7.375% with 2/1 buydown.

Backstory: My client contacted me in early 2023 for preapproval for financing of his first home. With very low funds available for a down payment, it was going to be necessary to use Federal Housing Administration (FHA) financing. His credit profile did not meet FHA standards, so I referred him to a credit repair agency that I have worked with for many years to see if the buyer’s credit profile could be improved.

The credit repair process can be a “slippery slope” for prospective home buyers, because many credit repair agencies are not effective and may mislead clients about the extent of possible improvement in credit profile. As a result, home buyers who are in need of this service should rely on their mortgage professional to recommend agencies that have a good track record.

In this case, the client’s qualifying credit score went from the low 500s to 659, putting him well within FHA requirements.

With the credit issue settled, we now had to contend with the issue of affordability. Most firsttime homebuyers are renters who face the prospect of a major increase in housing expense, a fact that has been exacerbated by the increase in mortgage rates in the last couple of years.

I suggested that the home purchase financing be structured using a 2/1 buydown, in which the interest rate in the first year is 2% below the mortgage interest rate, increasing to 1% below the mortgage rate in the second year and finally moving to the contract rate for the rest of the loan term.

Use of this structure has the following rationale: In this case, the mortgage payment (not including property tax, home insurance and mortgage insurance) in the first year was $4,518, vs. $5,572 at the contract interest rate of 7.375%. This difference of over $1,000 was crucial in enabling the client to afford his first home.

While the rate ultimately reaches a level that is above what would be available now for a standard 30-year fixed loan, that rate will likely not be reached because, if Fed rate projections are to be believed, long-term rates should fall over the next couple of years, enabling the client to refinance the loan.

The buyer’s agent, Alonya Buford with Keller Williams in Oakland, skillfully negotiated seller funding of the mortgage buydown. Even with that buyer concession included in home purchase terms, the home appraisal came in $4,000 over the sale price.

The home purchase market for first-home buyers remains challenging. Fortunately, resources and financing mechanisms exist that facilitate homeownership.

Sheila Perez, Holmgren & Associates, a division of American Pacific Mortgage Corporation,

510-343-1730, sheila.perez@apmortgage.com.