How is This Mortgage Different From all Other Mortgages?
Thursday, November 17, 2016
Securing financing for independent living is a huge and sometimes necessary task for families with special needs preparing to help individuals with disabilities live independently. ILO participating family member and blog contributor Barbara Goldschmidt has recently researched the process involved with securing a special needs mortgage, and shares her experience and her knowledge of the process with readers in ILO’s latest blog post (shared below). For more information on ILO and the work this non-profit organization does building intentional communities for adults with disabilities, please visit their website www.ilonow.org, or email firstname.lastname@example.org.
Written by Barbara Goldschmidt
Creating a sustainable and supported living situation is at the heart of what ILO families seek. Our 30-year old daughter, a self-advocate of ILO, currently works part-time as a teaching assistant. We have considered an apartment rental—perhaps in the same building as other ILO participants—or a house share with typical young professionals. We had not thought of purchasing a place until we heard that there were special mortgage programs for people with a disability.
So I set out to learn what help there might be for her. As any parent in my shoes knows, the first thing you have to do when figuring out next steps is to find out what the right questions are! The research I’ve done so far has unearthed the questions. What’s next will be options rather than pat answers, because every situation is so unique. It’s all about making informed choices. From my own experience and the experience of ILO parents who’ve made a purchase, unless you have a Ph.D. in this area you will need the help of a knowledgeable professional.
Home Ownership in a Word: Complicated
About 67% of Americans own their own homes, compared to only 10% of people with disabilities. While getting a mortgage is difficult for everyone, those with special needs have even more questions that need to be answered, such as who should own the property, how will it be financed, and how it might be shared. That said, someone with a disability who wants to buy a home can get help in making that dream come true. While there are many advantages to owning a home, decisions have to be made carefully, especially if government benefits are involved.
Maedi Tanham Carney, founder of ILO and president of M&L Special Needs Planning, says that someone who receives SSI, SSDI or CDB/DAC (Childhood Disability Benefits sometimes called Disabled Adult Child) will most likely be eligible for a mortgage program for individuals with disabilities. Glen Lazovick, a vice-president of residential lending at Apex Home Loans who has helped parents in the DC metropolitan area, says a letter of explanation and a diagnosis may suffice. In other words, mortgage approval may not necessarily depend on the adult child receiving government benefits.
The primary source for such a loan is the Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, the leading provider of mortgage financing in the U.S. Fannie Mae has special eligibility guidelines for parents who want to buy property for their adult disabled child. For instance, it will consider the parent the owner/occupant if the disabled adult child is unable to work or does not have sufficient income to qualify for a mortgage on his or her own. This is important because it recognizes the property as a primary residence instead of as an investment property. That means a lower interest rate and a down payment of only 3-5%, instead of the 20-30% a rental property requires.
Why does Fannie Mae make this exception? An article on the website My Mortgage Insider states that “It all comes down to risk. Non-owner-occupied homes, also known as rental homes and investment properties, are higher risk. Owners of those types of properties will default on the loan before defaulting on their own primary home loan. Fannie Mae assumes that parents are not very likely to default on mortgage payments they make for a disabled child’s residence.”
In addition to allowing payments from parents to qualify a disabled buyer, Fannie Mae will consider rental payments (such as a basement apartment) as another income source. More details can be found on the Fannie Mae website.
If the mortgage is being taken out by parents, loan approval will depend on income and asset verification of the parents. Parents applying for this type of loan will also need proof of their child’s permanent disability, paystubs from the child’s workplace, if any, and documentation from social security payments or other disability income. The down payment cannot be borrowed. If a trust is making the down payment, the bank will verify that it’s a legal expenditure.
The self- advocate’s tax returns will also be required. Usually, mortgage companies look at tax returns to be sure the borrower can afford the loan. However, Glen Lazovick contends that with mortgages like these the bank wants to know that the borrower can’t afford it. “Fannie Mae verifies that the adult child doesn’t have significant income or resources,” he says.
One ILO parent warned that in addition to providing copies of the self- advocate’s income tax return, the lender will also need to order transcripts directly from the IRS. That process will take time, so it should be one of the first things requested during the mortgage application.
Who Will Own the Property?
An article on the Special Needs Answers website states that people with special needs who have a cognitive disorder should not own property in their own name, to avoid any possibility of their being taken advantage of.
One ILO participant lives in an apartment that was purchased by her mother through Fannie Mae. The property is owned by the mother’s revocable trust (not a special needs trust). Another ILO family recently purchased an apartment for a self-advocate through Fannie Mae with the mother and father as owners/occupants.
Who Pays the Mortgage?
How can someone who has a low monthly income manage to make mortgage payments? The short answer is: they will need help. What to do?
In one ILO family, an apartment purchase was made by the parent and is owned by a trust. The self-advocate who lives there receives benefits that help to pay the monthly cost. Another family made an outright purchase. My daughter does not receive any benefits. The cost for her housing will have to be covered by her earnings, our help and perhaps whatever a roommate chips in.
That said, those who receive benefits have to consider how they may be affected by a purchase and subsequent mortgage payments. When someone other than the beneficiary pays the mortgage it’s counted as in-kind support and maintenance (ISM). This is where a knowledgeable special needs planner is especially important because this can be seen as a supplementation of income. Rules vary depending on what kinds of benefits are received. I found some conflicting information about what can happen. Dig deeply into these questions when you consider buying:
- During each month someone other than the beneficiary pays the mortgage will an SSI award be reduced? Maedi Tanham Carney of M&L Special Needs Planning says the SSI award will be reduced, but by no more than one-third of the Federal benefit rate (in 2016, $733 per month).
- If monthly SSI payments go down, will health benefits be affected? This is one of the areas where I found conflicting answers. An article on the Special Needs Answers website says that if the SSI award is less than $244 a month before the purchase of the home, SSI could be reduced to zero and health benefits could be lost.
- When there is an outright purchase by a trust or family member, will it count as in-kind support and maintenance (ISM)? According to Special Needs Answers, an outright purchase of a home means SSI benefits could be reduced, or even lost, for that month. Eligibility could be regained at the end of the month.
- Rules for CDB/DAC and SSDI have different criteria than SSI. Basically, the benefits from SSDI and CDB/DAC will not be affected by home ownership. That can be a blog for another day.
In addition, to help with a mortgage, there are also programs that can help with down payment and closing costs. The Homebuyer’s Purchase Assistance Program (HPAP) helps low-to-moderate income DC residents by offering interest-free loans for down payment and closing costs whether buying a single-family home, condominium or cooperative unit. Individuals who are disabled or handicapped receive priority, along with those who are low-income, elderly or displaced. Loan repayments are deferred for five years. Details on the program can be found on the website for the DC Department of Housing and Community Development (DHCD).
Who Can Share the Home?
If a special needs trust owns the home, rules about who can share it will vary by state and even by local judges if the trust is subject to court supervision. Whether or not someone who shares the house must pay rent depends on the kind of ownership and if the person provides services that enable the beneficiary to maintain independence. Attorney Martha C. Brown outlines some of the considerations in the Special Needs Alliance newsletter.
Is Anything Affordable?
Another problem for self-advocates living in the Washington, DC metropolitan area is the high cost of housing. Families can try to find an Affordable Dwelling Unit (ADU), an umbrella term applied to properties for sale or for rent that are offered at a below-market rate to low-income households. The developer sets aside these units in exchange for zoning relief, tax incentives, public financing, or the right to use District-owned land. There are income limits and resale restrictions. Details and property listings are on the Department of Housing and Community Development (DHCD) website.
The District also has an Inclusionary Zoning (IZ) Program which requires set-aside affordable units in new residential development projects and rehabilitation projects that are expanding by 50 percent or more. The Inclusionary Zoning (IZ) Units are available for low-income families who live and work in the District. To buy or lease an IZ unit, you have to take an orientation class and register for the program on the Department of Housing and Community Development website. Then you are eligible for the lottery registration. As units become available, lottery participants are notified.
Montgomery County, Maryland offers Moderate Priced Dwelling Units which are handled by its Department of Housing and Community Affairs (DCHA). Details are on the website.
Some sources say owning can be less than renting when using a mortgage for an individual with a disability. I’m not so sure about that as the minimal down payment and low-interest rates are only part of the equation; there will also be condo or co-op fees every month if living in an apartment. I was feeling kind of hopeless about the costs, as my daughter receives no benefits and we are struggling to figure out what may be best long term.
However, Glen Lazovick pointed out some advantages to owning which really make it worth considering. One, there is a tax advantage for homeowners which allows deductions for interest and real estate taxes. Check with your financial advisor. But more importantly, the home could be an appreciating asset. This may provide security down the road once the parents are gone. If the self-advocate is young—say about 30, which is our daughter’s age—she would be paying rent for 35 years before she can retire. That would be over $600,000 spent with nothing to show for it. If she owns a place, she may have the option of a sale to help her financially.
Going forward, I’ll follow the advice so many people I talked to repeat: find an experienced special needs financial planner. Then, if we want to get serious about buying a place, go to a mortgage broker or loan officer who is a Fannie Mae lender. And though I try not to be a magical thinker, I do believe there is a little bit of mystery in finding one’s home, so I leave room for that too.
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