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Down Payment Assistance 101

Get the low-down on how to hurdle the main obstacle stopping first-time buyers from purchasing a home

Did you know that buyers obtain an average of $13,000 in down payment assistance? Did you know that 84 percent of the properties in the U.S. qualify for these programs, and that there are about 2,400 programs available nationally? There’s no better time than now for our buyer clients to make their dream of homeownership come true.

Lack of a down payment is the real estates industry's No. 1 obstacle blocking first-time buyers from purchasing a home, but it can be equally challenging to existing homeowners who may be forced to sell due to some circumstance. Even more importantly, it’s a powerful tool the entire industry can use to turn the tide on the disturbingly low rate of American families unable to move into their very own dream home.

Today’s millennial buyers are having more trouble assembling the cash for down payments than their older siblings and parents because they have higher levels of student loan debt and lower levels of wealth and personal income than their two immediate predecessor generations (Gen Xers and boomers) had at the same stage of their life cycles.

Mortgages with lower down payments can slice years off the time it takes to save and turn renters into buyers fast. A Federal Reserve survey from 2015 found that consumers’ willingness to pay for a new home increases by about 15 percent when households can make a down payment as low as 5 percent of the purchase price instead of having to put down 20 percent. But for current — and often relatively less wealthy — renters, their willingness to pay for a new home on average increases by more than 40 percent.

A wealth of down payment options

Not since lenders offered no down and low down payment mortgages at the height of the boom — loans that contributed to the housing crash and to millions of foreclosures — have first-time homebuyers been able to buy a home for so little cash.  In 2004, the median down payment for first-time buyers was three percent, and 42 percent of them were financing homes with no down payment at all. Even today, low down payment and no down payment programs are not popular with some lenders and policy-makers. 

They argue that owners with low or no down payments have less of an investment in the home (sometimes called “skin in the game”). That’s one reason a million or more owners who had little invested in their homes because they put nothing down voluntarily abandoned their homes to foreclosure when prices fell so far that they owed more on their homes than they were worth.

So what’s the secret for millennials’? The answer is three letters: FHA.

Created to revive homeownership during the Great Depression, at the height of the housing boom in 2006, Federal Housing Administration (FHA) accounted for less than five percent of the mortgage market. By 2010, its share exploded to nearly a quarter of all originations. Now FHA, with down payments for as low as 3.5 percent, is the loan of choice for millennials. 

Like all most low down payment programs, FHA requires mortgage insurance, including an upfront payment of 0.85 percent of the loan amount. Lenders typically roll this upfront fee into the loan, so it does not increase the cash required to close.

A negative with many borrowers is FHA’s “life of the loan” policy, which requires borrowers to keep FHA’s mortgage insurance as long as they have an FHA mortgage. Owners who want to get out of an FHA earlier can refinance to a conventional loan.  However, FHA is not the only program available. There are thousands of low down payment loans and down payment assistance programs available today.

Here are some options with lower down payments: 

Fannie Mae | Two years agoLast year, Fannie Mae launched a 3 percent down mortgage option. Fannie Mae has offered a 5 percent down payment option for more than 25 years. The new option is available only to first-time homebuyers who qualify, and it requires mortgage insurance. Click here for more Fannie Mae information.

Freddie Mac | Freddie also has launched a 3 percent down program called Home Possible Advantage that is not limited to first-time buyers but has income limits and requires borrowers to take Freddie’s homeownership education program. Click here for more Freddie Mac information.

U.S. Department of Agriculture | The Rural Development Service of the Department of Agriculture finances 100 percent (no down payment) loans for single family homes in designated rural areas. It includes an income limits. USDA also subsidizes low and very low-income buyers with of payment assistance. Click here for more U.S. Dept. of Agriculture information. 

Veterans Administration | Qualified veterans and their surviving spouses are eligible for no down payment loans with no mortgage insurance requirement. Click here for VA information.

State and local housing finance agencies | Some 2,406 homeownership assistance programs available, and 84 percent currently have funds available to prospective homebuyers. Most of the programs — 63 percent — are limited to first-time buyers. They include programs that employers offer to attract employees, programs for law enforcement workers and teachers, and programs sponsored by major banks and other lenders for lower income borrowers who have difficulty getting a loan .

What is down payment assistance?

Down payment assistance is “money to help homebuyers get into a home,” by helping them accumulate their down payment and closing costs. These programs are administered by federal, state and local housing finance agencies, nonprofits and employers.

What blocks buyers from using down payment assistance?

First and foremost, many consumers believe that they must have a 20 percent down payment to purchase a home. They’re unaware that FHA and other lenders have programs with down payments as low as 3.5 percent. Moreover, only a few real estate agents and brokers in the industry know that these programs can be coupled with down payment assistance. 

Help for current homeowners as well

While 64 percent of the down payment assistance programs do have a first-time buyer requirement (i.e., you haven’t owned a property for three years), 36 percent don’t.  This can be a real bummer to homeowners who are forced to sell right now, especially those who would benefit from down payment assistance to purchase a less expensive property. (They will need a minimum FICO score of approximately 640-660, and in some cases, 700.) 

Types of programs available

When we searched for programs for a client's house hear in California, there were 25 programs and up to $125,000 in down payment assistance available. Here’s what came back in the search. The 25 programs from the search can be grouped into the following categories:

Down Payment Assistance (DPA) from federal, state and local agencies | About 77 percent of the available programs provide money towards the down payment itself or closing costs. The amount typically ranges between 3 to 7 percent of the mortgage amount and is secured with a second mortgage usually requiring no monthly payments and zero percent interest.   The loan is not due until the buyer sells or refinances the property and is referred to as Deferred Payment Arrangements (DPAs). These include forgivable DPAs, and they’re available to both first-time buyers and current homeowners. 

The programs for this particular property ranged from 4 to 7 percent of the first mortgage amount that’s forgivable after three to five years. On a $300,000 loan, that’s $12,000 to $21,000. Some of these programs have no income limits which means they can be used on higher priced properties.  

Grants — free money, really! | Grants account for only about 5 percent of the down payment assistance programs.  Nevertheless, this particular property was eligible for five different grant programs including one from the Golden State Finance Authority of up to 4 percent of the mortgage amount, two from the Southern California Home Financing Authority, and two grant programs from local Realtor associations.  

Mortgage Credit Certificates — if you can find one, these are gold | In order to offer a mortgage certificate, a state or local finance agency must obtain bonding authorization. These are available in approximately 40 states. “It’s a true tax credit, as opposed to a tax deduction". Just to give an example, assume that the borrower has taken out a $200,000 loan at a 4 percent interest rate. The finance agency can offer up to 25 percent of the interest amount the borrower paid as a tax credit. In this case, the borrower would pay $8,000 in interest the first year. The borrower could deduct up to $2,000 (25 percent) as a credit against their total tax due and still take the remaining $6,000 they paid in interest as a tax deduction. The program stays in place for the life of the loan. 

Lease-to-own matching programs | The Federal Home Loan Bank (FHLB) offers two different lease-to-own programs: the Individual Development and Empowerment Act (IDEA) and the Workforce Initiative Subsidy for Homeownership (WISH). These programs are available across the country and help renters transition to becoming homeowners through a lease-to-own program. 

For this particular property, borrowers were eligible for a 4-to-1 matching grant up to $22,000. There were two options. Borrowers could elect to save as much as possible for up to 10 months. The program would pay them $4 for every $1 they saved. The second option was a lease-to-own program that lasted for up to three years, again matching the borrower’s contributions up to $22,000 on a 4-to-1 matching grant.  

Special programs for firefighters, military and school employees | Many of the programs discussed above are specifically targeted to firefighters, the military and school employees. The goal is to help individuals who serve their local communities.  

Layering — how to get even more money! | Many down payment assistance programs can be “layered,” or in other words, combined with other programs. For example, one borrower might qualify for assistance as a teacher, and the other borrower could qualify for a forgivable second mortgage with the deferred payment program mentioned above. These programs could then be combined with a mortgage certificate.  

Every borrower is unique regarding their employment, state and locality, and property. Given this, down payment assistance programs will vary from borrower to borrower.  Contact Wagner Real Estate to discuss searching programs that may be available to you.

 

Contacts

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