As I've stated on this platform several times, saving for a down payment in today's world has proven difficult for many otherwise qualified potential home buyers. Rent prices are historically high and climbing and home values are increasing while wages remain stagnant. The amount of time it takes someone to save even 3.5% for a down payment is handicapping a large percentage of first time buyers as well as those wishing to re-enter the market after falling victim to the housing crisis several years ago. Here in the state of Arizona there are several down payment assistance (DPA) options available and one of the most popular in recent years has been the Maricopa County Home in 5. Due to some findings by the HUD inspector general that program has changed a little bit but it's still an option for many buyers. I want to take this space to highlight another program which I feel is actually a better option for most buyers in need of DPA. The Arizona Housing Finance Authority Home Plus Program. There are two different program options within Home Plus. Both programs offer full GRANTS that don't have to be paid back, just like the Home in 5, so how does a loan officer tell which one is right for their client? Well it's knowing which questions to ask and finding out the buyer's goals, both short and long term.
As a certified continuing education instructor in the state of Arizona one of the courses I've recently started teaching is "Down Payment Assistance and the Consumer"- in the Fair Housing category. So far I've had a total of 45 agents sit in the classes I've taught on the subject and a grand total of ONE agent has heard of this program, while almost all had heard of Home in 5. I'm not sure why lenders aren't informing agents of this option. Perhaps their company isn't a participating lender or perhaps they are so comfortable with Home in 5 that when they hear DPA that's the only thing they look at. Of course I'm just speculating. Here are some of the highlights of the Home Plus program vs. Home in 5:
Grant Amount:
Home in 5- 4% of final loan amount
Home Plus- 4% of final loan amount or 5% of final loan amount depending on credit score/option
Down Payment Required
Home in 5- 3.5% of purchase price
Home Plus- Either 3% or 5% of purchase price depending on credit score/option
Origination Charge to Customer
Home in 5- 1% of loan amount
Home Plus- None
Interest Rate*****
Home in 5- FHA program with rate Set by the IDA (subject to change but currently 4.375)
Home Plus- Conventional Program Set by Housing Finance Authority (Currently 4.875 for 3% program and 5.125 for 5% program- subject to change)
***Try not to get hung up on the interest rate yet
Mortgage Insurance
Home in 5- FHA program subject to 1.75% upfront MIP and .85 monthly MIP that remains for the life of the laon
Home Plus- Conventional Program with discounted coverage (varies per provider) and no upfront PMI. Following conventional guidelines the MI will be removed from the payment once the loan balance reaches 78% of the original balance.
Required Credit Score
Home in 5- 640
Home Plus- 640 for the 5% grant (95% Loan to Value) and 680 for the 4% grant (97% LTV)
So now that I've pointed out some of the highlights to the programs you may look at it and say, "Home in 5 has such a lower interest rate that it must be the best program"- but let's take a deeper look into it. I ran some numbers using a $260,000 purchase price as an example and what I came up with may surprise you.
HFA 640 Credit Score Home in 5
Current Rate 5.125% 4.375%
Origination Fee $0 $2600
Initial Monthly Pmt** $1735.55 $1687.29
Monthly MI $ 152.32 Cancels at 78% (appx 5 years) $179.94 for life
Loan Amount $247,000 $254,036
Grant $12,350 $10,036
Down Payment $13,000 $ 9,100
Buyer paid down $650 (-$936)
Plus Origination $0 $2540
Borrower Funds to
Close $650+ closing costs $1604+ closing costs
That’s almost an extra $1000 out of pocket more on the Home in 5 program to save $48 per month. It would take nearly two years at the lower payment to make up the difference depending on what the seller concessions are. If they are using it as a starter home with the idea of selling in 2-3 years they not only will not see any savings from the Home in 5 payment they’ll be starting with a higher loan balance to pay off at the time of the sale. Also, the higher beginning loan balance makes the idea that they'll just refinance into a conventional in a couple of years not sensible. Keep in mind too that if they intend to keep the loan moving forward/long term the payment on the HFA preferred will drop $1583.23 once the balance reaches 78% of the original loan balance. This usually happens in year 5 if the payments have been on time.
Using the same purchase price if the buyer has a 680 FICO score they can use the 97% HFA Preferred. In this case the grant will provide them enough money to cover the entire down payment with over $2200 to help with other closing costs and the initial monthly housing expense will be $1682.15 and the MI of $168.13 will drop off at 78% of the loan balance. So if you are a buyer with a 680 credit score looking for DPA there is NO REASON whatsoever to purchase using a HOME in 5 grant unless you've had a short sale, bankruptcy, etc and are yet to meet the conventional seasoning requirements.
You might be asking yourself in what scenario would the Home in 5 be better. The answer isn't clear and is totally dependent on the buyer. Once scenario would be if the buyer meets the FHA seasoning requirements for something like a bankruptcy or foreclosure but not the conventional requirement. Aside from that and considering that the number one concern for most people using DPA is the amount of money they have to bring to the table Home Plus makes more sense more often than not. However, in instances in which the seller is contributing a large amount to closing costs the Home in 5 may be a better option.
If the buyer intends to remain in their home long term than it's my opinion that a conventional program is always a better option for the sake of the mortgage insurance issue. I personally have a difficult time telling someone that we'll be able to refinance them in a year or two, or whenever. If the buyer intends to use this as a starter home and sell it then wouldn't you want to come in with less money at a lower loan balance? Again, it's important that the loan officer really takes the time to know what are the needs of their client as opposed to trying to get themselves a quick and easy deal.
If you want to see if you qualify for down payment assistance and which program is right for you feel free to contact me. Mtizzano@amerifirst.us or 480.512.9052
*The examples listed above are based on the program interest rates at the time of the original posting of this article. Estimated monthly payments include principal, interest, estimated monthly property taxes, estimated monthly hazard insurance, and mortgage insurance premiums.
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