What you should know about Down Payment Assistance

By
Mortgage and Lending with First Option Mortgage 269761

Down Payment Assistance (DPA) is a program offered by many “non-profit” institutions and government entities that provides First Time Homebuyers and non-First Time Homebuyers money to be used to pay for the Down Payment or Closing Costs and Prepaid Items necessary in buying a home. In most cases, the type of loans associated with DPA are government backed loans (FHA, VA), Fannie Mae’s HomeReady Program and Freddie Mac’s HomeSteps Program. There are thousands of companies and government entities offering DPA programs:

  

  •          Loan Officers tend to pre-qualify a person without taking into account the guideline requirements of DPA programs. Make sure you tell the Loan Officer that you need DPA
  •          In most all cases, the buyer is required to have “skin in the game” in order to obtain the funds. In other words, the buyer must pay a percentage of the down payment at closing (usually starting at $1000)
  •          Some programs cap the amount of assistance to $5000 while others go as high as $15,000
  •          Most all programs “match” the amount paid by the buyer on a ratio basis. For example: You pay $1000, the program gives (or lends) $3000. You pay $5000, the program gives (or lends) $15000
  •          Some programs require buyers to attend a Home Buying course which may cost as much as $500 and require 8 hours in a classroom. Other programs are done over the phone for much less
  •          When shopping for a mortgage, ask the Loan Officer to tell you about the different DPA programs available AND offer a backup plan in case you don’t qualify for the program
  •          A buyer may not qualify for DPA based on several factors: Income too high, not enough savings, credit (or credit score) issues, Debt to Income ratio issues, location of property, type of property (condo/co-op for example), property title issues to name a few
  •          Try to save up your own money for Down Payment since many programs tend to run out of by September (just before the end of the government fiscal year). Plan accordingly
  •          Be careful with Loan Officers who are not familiar with DPA programs. If you have to use someone who is not familiar, ask to speak to a Manager as well
  •          Some programs limit your income qualification depending on your credit score. For example, if you have less than a 640 credit score, you may only be able to use 28% of your gross income, whereas a 660 score allows 33% of gross income
  •          Some programs require that the DPA entity underwrites the loan, instead of your lender. This may cause a delay in closing by as much as 30 days
  •          Some programs require that you pay back the entire amount borrowed
  •          FHA’s 203k (rehab) loan does not allow DPA
  •          FHA’s HUD home purchase program ($100 down program) does not allow DPA
  •          Even though VA is mostly 100% financing, DPA can be used to help pay closing costs
  •          Conventional loan products (Fannie and Freddie) have very strict guidelines on credit and income qualifying. Make sure your Loan Officer is familiar with both
  •          Some programs require that you pay back the loan if the property is sold, refinanced, rent it out or no longer live in the property (as reported on tax returns)
  •          Some programs do not require repayment as long as you live in the property for at least 5 years. For example, each year 20% of the amount owed is reduced and after 5 years, no money is owed
  •          Once you sign the loan documents, stay on top of your lender to get the DPA counseling completed. This seems to be a major issue of funding and delayed closings
  •          Most programs restrict the buyer’s income to 80% of the median income for that area unless the person buys a house in a low income housing area
  •          The credit score requirement is different for all programs. In most cases, for Government loans, the minimum score is 620. Conventional is 660
  •          Do Not go to a home buyer course before applying for a loan. The lender may not accept the course certificate
  •          Know your options: VA loans for Military, FHA $100 Down Payment Program, USDA 100% financing, gift from relative for down payment, 401k loan
  •          Be aware of programs that increase your interest rate to obtain DPA. HUD is investigating this practice to ensure it is not being done, however, it still happens
  •          Go to your county, state or city website and see if they offer DPA programs. For example, in Georgia, there are counties that offer DPA if you buy a foreclosure home
  •          Ask your Realtor to provide you with a lender who is familiar with DPA programs and who has a history of closing them on time
  •          Allow at least 45 days to close on FHA loans and 40 days for conventional loans requiring DPA
  •          Some DPA programs pay the Loan Officer a very small fraction of what he/she would earn on closing a loan without DPA. This may cause the Loan Officer to treat you differently. Remind the Loan Officer that you know a lot of people for referral purposes and notify your Realtor if you feel you are being treated unfairly
  •          Down Payment Assistance programs cost lenders up to 10% of their net profit each year. Make sure the lender is keeping the program during your process by asking Senior Management (yes, you can talk to them)

 

Down Payment Assistance programs have grown in recent years and I fear that if too many buyers depend on this program to obtain a mortgage loan, we may see another housing collapse in the near future. The majority of people needing DPA programs are those who cannot save money for emergencies, have no retirement set up and can barely afford to pay their debts. I don’t know what the solution is but I prefer to work for companies that DO NOT offer DPA so that I’m not part of the problem.

 

 

Comments (2)

Joe Jackson
Keller Williams Capital Partners Realty - Columbus, OH
Clintonville and Central Ohio Real Estate Expert

Down payment assistance can be a tap especially if buyer pays over the market price!

Jul 26, 2016 05:39 AM
Bill Polack
First Option Mortgage - Suwanee, GA
Bilingual Spanish Loan Officer in Southeast US.

Sorry Joe. I don't understand your comment regarding "tap".

Jul 26, 2016 11:13 PM

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