Neighborhood Housing Services of Lehigh Valley has developed the Short Term Lease Purchase Program to help households with minor obstacles to home ownership to obtain a mortgage for home purchase. The household must be able to resolve these barriers to home ownership within six months to one year.

Neighborhood Housing Services of Lehigh Valley (NHSLV) is a resident-led, not-for-profit community development organization that encourages pride, involvement and leadership in its target neighborhoods of Allentown, PA. NHSLV is dedicated to improving the quality of life for all persons in its service areas by offering and facilitating home ownership, housing rehabilitation, lending, counseling and educational programs.

Program Purpose.  NHSLV discovered that many potential homeowners who had already signed a purchase agreement for their “dream home” were applying for a loan but needed help resolving minor problems in order to obtain their mortgage. The Short Term Lease Purchase Program allows NHSLV to step in and purchase the home so that the applicant will not lose it while waiting for lender approval. Many potential homeowners with such situations turn to predatory lenders for their financing, and NHSLV’s program addresses this risk by keeping the home off the market while the customer works with a reliable lender.

Partnership.  The main partner for the lease/purchase program is PNC Bank, which has provided a $500,000 line of credit for the program at 8 percent interest. In addition, most lending institutions throughout the Lehigh Valley are aware of the program and refer potential clients to NHSLV.

Partner Responsibilities.  The executive director of NHSLV and a first-mortgage lender are responsible for reviewing the client’s eligibility documentation and ensuring the customer is able to correct the outstanding issues within six months to one year. Also, at this point any alternatives are recommended to the customer to help him or her remedy the situation. The executive director and first-mortgage lender are also responsible for following up on all outstanding issues and are responsible for monitoring the client’s progress to assure program compliance.

Points of Eligibility

• Income. The customer’s annual income must be between 80 and 120 percent of area median income, as established by HUD. Applicants may choose whether or not to disclose the fact that they are receiving alimony or child support.
   
• Funds needed to participate in the program. Applicants need $1,600 to participate in the Short Term Lease Purchase Program. There is a $325 nonrefundable application fee, and $1,275 is applied toward the purchase of the selected property.
   
• Credit history. Applicants must have an acceptable credit history before taking ownership of the selected property. Before being accepted into the program, applicants need to provide written verification that all unpaid or delinquent accounts and judgments have been satisfied. Participants must also provide three acceptable alternate sources of credit before being accepted into the program. These may include rental-payment histories, utility-bill payments, etc.
   
• Two years of employment. Applicants must verify that they have been employed for at least two years before taking ownership of the property. Other forms of stable income, such as social security, may be considered. The income used will be the most current as verified by the employer, and needs to be supported by a W-2 form.
   
• Attendance at home-ownership counseling seminars. Applicants are required to attend the Home Ownership Counseling Program (HOCP) seminars, coordinated by the Community Action Committee of the Lehigh Valley, before taking ownership of the property. (For more about HOCP, see the Winning Strategy on page 2–39.) The 15-hour homebuyer seminars are held seven times annually at various locations throughout the Lehigh Valley. Two of the seven seminars are conducted in Spanish.
   
• Debt-to-income ratios. Debt-service-to-income ratios must be at or below 33/38. The 33 percent includes housing expenses such as the first mortgage, second mortgage, taxes and insurance. The 38 percent includes the total debt, including housing expenses, revolving debt, installment debt, and legally required child-support payments.

Order of Operations and Additional Program Requirements

• All applicants must be referred to the program by a local lender.
   
• A written plan for addressing the minor issues must be agreed upon by the applicants, the local lending institution and NHSLV. The applicants are required to sign the agreement.
   
• Upon receipt of the signed plan by NHSLV, the applicants are notified to start shopping for a suitable property in their approved price range. Single-family dwelling units in Lehigh and Northampton counties are eligible.
   
• When a suitable property has been found, the NHSLV rehabilitation consultant completes a property inspection. All properties must meet the approval of NHSLV.
   
• Upon approval of a suitable property, NHSLV makes arrangements to purchase the property. Immediately after settlement, the applicants sign a Lease With Conditional Option To Purchase agreement, which states the terms and conditions of the lease. The terms and conditions include factors typically found on a rental lease, but also include the conditions under which the customer will be able to purchase the property.
   
• The executive director at NHSLV and a representative of the lending institution are responsible for monitoring the client’s program progress and all terms of the lease agreement.
   
• When the terms of the lease agreement have been satisfied, the lending institution is responsible for processing the loan application and issuing a commitment letter. NHSLV assists the applicants in obtaining any special grants or loans for closing-cost assistance.

Program Planning Group.  The loan committee of NHSLV reviews and updates the program policy on an annual basis. The executive director and NHSLV lending staff are responsible for processing each customer.

Program Costs.  The costs of running this program are not extensive and do not require additional services other than hiring the rehabilitation consultant for the walk-through inspection. The lease/purchase program is simply part of the programs and services offered by NHSLV, though these files are monitored more frequently.

Loan-Loss Reserve Account.  NeighborWorks America gave NHSLV a grant of $40,000 to start a loan-loss reserve account to be used in case an applicant defaults on the purchase of the property. All sellers (or the sellers’ real estate agents) are required to contribute one-half of one percent of the purchase price to NHSLV, which is deposited into the loan-loss reserve account.

Marketing.  NHSLV does not market this program specifically. Most local lenders and Realtors know about the program and make referrals. NHSLV also mentions the program at various seminars. The lease/purchase program is listed in NHSLV’s service brochure, and a one-page program description is included in its home-ownership packets. NHSLV initially announced the program at the “Homebuyers Supermarket” (a local homeownership fair) and received some press coverage when the program began.

• This program has proven to be another example of an innovative partnership between NHSLV, the lending community and households that want to become homeowners. Currently, there are five households participating in the program. Ten households have purchased their homes through this program. On average, NHSLV completes four lease-purchase deals annually.
   

• Loan-Loss Reserve Fund. It is vital to have a loan-loss reserve fund in place in case a surprise situation interferes with the conditions of the contract (loss of a job, divorce, illness, etc.). If this type of situation does arise, make sure that the household can follow through with the deal; if it can not, take immediate action, so that nothing adverse happens to the property. NHSLV had to use funds from its account to pay for repairs at two properties where the customers had damaged the property after defaulting on the contract. There were also attorney fees and carrying costs accrued while the properties were vacant.
   
• Monitoring Participating Households. Monitoring each household is a very important component to this program. Order a credit report on a quarterly basis to ensure that no new credit issues arise, and if the household does not pay the rent on time, investigate what the problem is and help to rectify the situation.
   
• Program Challenges. The only major challenge NHSLV has experienced with this program was dealing with unforeseen situations that struck customers. Otherwise the program has been fairly easy to implement and maintain. An organization must realize that these unexpected situations will occur, and it is important to act swiftly, plus seek out flexible and creative solutions to the problem.
   
• Conclusion. NHSLV recommends heavy screening of potential applicants and building a strong partnership with local lending institutions. This is the only real way to secure a strong and successful program.

Agency interview with: Janis Geist