The Neighborhood Assistance Corporation of America (NACA) is a nonprofit organization aimed at making homeownership affordable to underserved borrowers in lower-income communities. It coordinates with lenders to offer qualified borrowers rates and terms far better than those in the prime market. Plus, borrowers can obtain a NACA loans with no down payment, no closing costs, no private mortgage insurance (PMI), and no credit score check.
Sound a little too good to be true? As you might have guessed, there are some tradeoffs you make in exchange for this affordable homeownership program.
That said, NACA mortgages allow house hackers who qualify to obtain an affordable loan for single-family, multifamily, or mixed-use properties. But the program isn’t a fit for everyone and comes with conditions and strings attached.
What Is the NACA Program?
NACA is a community advocacy and homeownership program certified by the Department of Housing and Urban Development (HUD). Its mission: to make the dream of homeownership a reality for working Americans by counseling and enabling even those with poor credit to purchase a home or modify a predatory loan with better terms.
Participants in the NACA program work with housing counselors to guide them through the mortgage application process. They then get paired with partner banks, including Bank of America, which provide the loans. Borrowers become members of the NACA organization and must maintain membership requirements, including $25 annual dues and participation in NACA events and activities.
The NACA Loans Program
NACA allows borrowers to obtain one mortgage with either a 15- or 30-year term. NACA mortgages require no down payment, no closing costs or fees, and no PMI. NACA doesn’t check your credit score (but does check your payment history). Even better, NACA mortgages offer below-market, fixed interest rates that borrowers have the option to buy down even further.
You can permanently buy down the interest rate on your NACA mortgage by purchasing discount points. Each discount point costs 1% of the home loan amount — essentially putting an extra 1% down to buy a discount point.
For a 30-year NACA mortgage, each discount point permanently reduces the already below-market interest rate by an extra 0.25% for the life of the mortgage.
That’s tough to beat.
NACA Mortgage Requirements
Although there’s no down payment for a NACA home loan, the program requires you to have cash available in savings. These “Minimum Required Funds” include an earnest money deposit that’s returned at closing, prepayment for property taxes and insurance, and up to six months of reserves for utility deposits and other expenses depending on the property and your financial situation.
NACA also requires you to pay for a home inspection and may require you to set aside additional cash to pay for fixing any health, safety, code, or structural issues identified.
You must occupy the home for as long as you hold the NACA mortgage. Further, no member of the household can own any other property at the time of closing. That may be no problem for first-time house hackers but is a nonstarter for real estate investors with an existing portfolio.
Finally, you must maintain a NACA membership in good standing, which requires a nominal $25 annual fee and mandatory participation in at least five NACA events or activities each year, including one prior to qualification and another prior to closing. These events include advocacy campaigns and volunteering activities that support NACA’s mission.
NACA places a $25,000 junior lien on the property to ensure you play by the program’s rules, and that you repay NACA any payment assistance you may receive after closing.
Eligibility: Who Qualifies for NACA Loans?
The NACA Home Purchase program focuses on low- to moderate-income borrowers (Priority Members) and low- to moderate-income areas (Priority Areas).
NACA loans are designed to help people who often become victims of predatory lending or borrowers otherwise shut out of the home financing marketplace. Its uses extend to aspiring house hackers with modest means looking to buy multifamily or mixed-use property in underserved rural and urban communities.
NACA defines its Priority Members as homebuyers whose income is less than the median income for their Metropolitan Statistical Area (MSA). Buyers under these income limits can buy their property anywhere. Borrowers with higher income, however, must purchase property in a Priority Area, defined as a U.S. Census Tract where the median income is below the median income for that MSA.
NACA doesn’t check your credit score but does check your payment history. Even if you have poor credit history and have missed some payments in the past, the program offers some leniency around circumstances beyond your control, like unaffordable medical bills, predatory loans, or hardship caused by natural disasters.
How To Get a NACA Loan
The process for obtaining a NACA loan is notoriously clunky, often taking between three to six months to complete.
First, applicants must attend a NACA homebuyer workshop and complete a face-to-face membership intake session in one of NACA’s local offices (or remotely via video counseling). Members walk away from the session with an action plan consisting of the steps they must take, including completing a budget and providing required documents. Typically, the full qualification process requires a follow-up session to complete.
What the #%& are real estate syndications, and do they really earn 15-30% returns?
Advantages of NACA Loans
Why do prospective homebuyers go through all that red tape?
- No down payment: Enough said.
- Low interest rates, no PMI: It’s hard to beat a NACA home loan in terms of raw numbers. NACA loans offer better than market rates with no PMI, for exceptionally low monthly mortgage payments. If you qualify, you aren’t likely to find a mortgage that costs you any less.
- No closing costs or fees: When you work through the NACA mortgage program, the lender pays the closing costs, including appraisal, title, origination fees, various other fees that easily add up to thousands to dollars.
- No credit score check: Borrowers with poor credit scores can still qualify for a NACA mortgage as long as you haven’t habitually neglected paying your bills in the past.
- Works for almost all property types: Most property types are eligible for a NACA mortgage, including condos, single-family, multifamily (up to four units), and mixed-use properties.
Disadvantages of the NACA Program
If the NACA loan program is so awesome, why isn’t everyone using it?
- Eligibility limits: NACA prioritizes lower income borrowers and lower-income locations. It also limits the price of the property you can buy. You’ll need to check with the local NACA office to ask what income level and property areas meet their criteria.
- Occupancy requirement: A NACA home loan requires you to occupy the property for the duration of the mortgage. No big deal for house hackers looking to live in one unit of a multifamily property and rent the others, but NACA loans are a no-go for other investment properties.
- Restriction on owning other property: Because the NACA program is designed to help lower-income people in underserved areas become homeowners, the program excludes real estate investors by disqualifying anyone with an ownership interest in any other property.
- Cumbersome application process: The application process for the NACA mortgage program takes an average of three months, according to NACA’s website. Joining the program includes workshops and counseling intended to educate and prepare borrowers in underserved communities for homeownership. House hackers with substantial financial literacy may not find this necessary, but still must spend the time completing these steps.
- Membership requirements: NACA member borrowers are required to attend at least five NACA events each year to maintain their membership. NACA credits its aggressive advocacy campaigns with keeping the program alive, so it takes participation in these events seriously.
Alternatives to NACA Loans
A NACA home loan won’t work for everyone. Even if you qualify, you might prefer a mortgage without the conditions NACA imposes. If the NACA mortgage program doesn’t seem like the best fit for you, consider these alternatives.
VA Loans
Current or former member of the U.S. Armed Forces enjoy access to VA loans backed by the U.S. Department of Veterans Affairs. A federal guarantee allows lenders to offer veterans better terms, including lower interest rates, no down payment, and no PMI requirement. An all-around good deal if you qualify as a service member.
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FHA Loans
The Federal Housing Administration (FHA) backs loans for homebuyers with limited cash to put down or impaired credit. FHA-insured mortgage loans come in many flavors but offer low down payments and lenient underwriting standards to give borrowers a better deal. In exchange, FHA borrowers must pay a premium for mortgage insurance and face a cap on the property price allowed. Like with NACA loans, FHA loans require the borrower to live in the property as an owner-occupant.
USDA Loans
The U.S. Department of Agriculture administers USDA loans for low- to middle-income homebuyers in rural areas with a population under 35,000. USDA loans require very low (often zero) down payments and lower credit scores than conventional home loans. They do require borrowers to carry mortgage insurance throughout the life of the loan. Only primary residences qualify for USDA loans and, importantly, they restrict some income-producing properties like hobby farms.
Fannie Mae or Freddie Mac Loans
Fannie Mae and Freddie Mac offer special home loans intended for lower-income buyers. Fannie Mae’s HomeReady program offers low-down-payment loans for borrowers with a minimum credit score of 620 but requires PMI, higher down payments for multi-unit properties, and has income limitations on borrowers in some areas. Freddie Mac’s similar Home Possible loan program offers 3% and 5% down payment loan options and does not require PMI once the loan balance drops below 80% of the property value. Borrowers with good credit scores qualify for the best rates. You’ll pay the usual closing costs. Both require the borrower to occupy the property but permit multifamily homes.
Is a NACA Mortgage Right for Me?
If you are looking to become a homeowner and house hack by purchasing a multi-unit property that you’ll also live in, a NACA mortgage may be the best deal around. The deal gets sweeter if you’re a buyer of modest means and looking to buy property in a lower-income neighborhood.
If this doesn’t sound like you or your situation, or you’re skittish about the strings attached to a NACA home loan, you may find a better source of funding elsewhere.
Final Thoughts
The NACA Home Purchase program offers generous terms with more than a few strings attached. For homebuyers who qualify for the program, it’s tough to beat a NACA mortgage from a raw numbers perspective.
If you don’t mind jumping through a fair number of hoops and living by the program’s rules and restrictions, a NACA mortgage may be one of the best deals around.♦
Ever participated in the NACA program? Are the 0% down payment and lower interest rates on NACA loans worth the headaches?
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To succeed in the NACA loan process, it’s important to be organized, attend sessions on time, self-assess your financial situation, keep communication with NACA, and have all required documents ready.
Sounds like you speak from experience Mandy!
A unique and rare feature in the market! Minus the red tape.
I never knew this program existed. Going to look into this, thanks
Keep us posted Lionel!