With most if not all of the conventional very-low or no down payment programs having evaporated with the sub-prime mortgage mess, how do first-time buyers with reasonable credit who can make payments but have very little up-front cash get into a home?  The answer may, or may not be the FHA Down Payment Assistance Program. 

We recently had experience with this program working with two buyers.  Both had good credit, but did not have much money to make a down payment and pay for closing costs.  One story had a happy ending, one did not. 

The first buyer found a well-cared for home in an established desirable neighborhood.  He wanted to finance the required 3% FHA down payment with a loan from a down payment assistance company.  This was to be added to the purchase price of the house, and to be paid back at closing by the seller.  The seller was also asked to pay for a few thousand dollars of the buyer's closing costs, allowing the seller to still net about 97 to 98 per cent of the list price of the home.  This worked out well, and we have a very happy buyer, and seller too, I think.

In the second case, our buyer found a wonderful little house which had been professionally updated in a neighborhood of lower-cost homes in a good area of town.  The homes in this area had been generally well kept, but the home our buyer wanted to purchase was really an exceptional home for the area.  We proposed  the same type of financing as with buyer one.  Unfortunately, different result.  We could not make the transaction work. 

What made the difference?  In the first case, the home had no difficulty in appraising for the amount of the purchase price with the down payment added.  In fact, it appraised for more.  In the second instance, because the home was so atypical for the area, we could not find comps to support the higher purchase price. 

It seems the FHA DPA may work well for some situations, but not for others.  Having a good understanding of what the house will appraise for seems critical to knowing whether this type of financing will work for your buyer with a given purchase.  What have you been finding with this program?