19 - Down Payment Assistance Programs

We dive into the world of down payment assistance programs and how they can help you achieve your dream of homeownership. With housing affordability becoming a growing issue, these programs are becoming increasingly important for first-time buyers. 

In this episode, we discuss:

• The different types of down payment assistance programs and how they work
• The various requirements needed to be considered for these programs, such as income, credit score, and residency restrictions
• The upsides and downsides of using down payment assistance programs, including the impact on your buying power and potential disadvantages in a competitive seller's market
• Tips on how to find and apply for these programs in your local area

Whether you're struggling to save for a down payment or just need a little extra help with closing costs, down payment assistance programs can be a valuable resource in your home buying journey. Listen in to learn more about these programs and how they can help you achieve your homeownership goals!

Transcript

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Welcome to the first Time Home Buyers podcast. November, 2022. Freddie Mac, which is a major provider of mortgage loans, released the results of their survey on home ownership with the top issues home buyers are facing. The number one issue was saving for a down payment, and I want to tackle that on today's. If you've been listening to any of my other episodes, you should know that you only need about three to three and a half percent down payment to buy a house and about another 2% for closing costs, but saving up that amount. Can be pretty difficult, especially with the rising costs of everything. In episode eight, I talked about how to save her down payment. Those tactics may not be for everyone, and the timeline might be too long with housing affordability being a growing issue, that's why there are down payment assistance programs available to help you buy a home. These programs come in many forms and they vary greatly from city to county to state. And even your income or your job can affect what kinds of down payment assistance you might be eligible for. But I do wanna say this first. There is no such thing as free money in one way or another. The funds come from somewhere. Most of these are gonna be grant programs that are funded at a city or county level. Those are probably your lowest cost options. There are others that will require payment in return plus interest or percentage. Or it's in exchange for a higher interest rate on your. So let's start with how down payment assistance works. When you buy a house, you need to pay for the down payment, as well as closing costs. Those are things that you're going to have to pay no matter what. Now, you may be able to get some sellers that are gonna contribute. Some don't forget, you might be able to get some as gifts. Sometimes there's some under credits, but that is always going to be kind of like gift money coming in for you. But in general, for an FHA loan, you'll be. Three and a half percent down conventional is gonna be at least 5% down and about two to 3% in closing costs. So a good estimate is you're gonna need at least 6% of the purchase price in funds that you will need to have available down. Payment assistance usually comes in the form of a loan or a grant to help pay for these costs. These can be in the form of a. Low or no interest loan, that access like a second mortgage on your house or a grant that's forgiven after a specified period. There's just so many programs out. And even some new federal programs in legislation right now that may be coming out soon. You may have heard of the Down Payment Toward Equity Act. This is a federal program, still not approved yet, but it's aimed to help first time home buyers and actually those that are the first in their family to buy a home with anywhere from 20 to $25,000 in assistance. Now, if this passes, it's gonna allow you to use the grant so long as you don't move. Or refinance. Sell your home for five years. There's no payback required. If you do in under five years, you're gonna have to pay back a portion on a graduated scale. This is an example of how many of these programs work. You're given a portion to use as a down payment based on specific requirements. let's actually talk about what those requirements are to be considered for down payment assistance., they're usually income limited. You must have an income that is below a certain level for the city or county. Some are very restrictive, requiring you to be under the average income. Some use other income measurements, which are more forgiving, and there are some programs that don't have a limit. I'll use San Diego as kind of a regional example, but there are some down payment programs that use the Cal HFA or Cal Hefa limits, which is $211,000. Remember, that's income limits, but for some San Diego County programs, so for sometimes even the city of San Diego, a married couple's limit for their income would be $83,300 annually. So you could see there's $130,000 in difference from just the income limits between different programs, between different ways they measure it. The next is gonna be purchase limits. So we talked about your income limit, but how much can you purchase? Well, most of these programs align with an FHA or conforming loan limit. So whatever the FHA limit or the conforming loan limit, depending on the type of program, if you're in a high cost of living area. This could impact the availability of homes that the program's gonna work for and potentially not have any available because they're just outside of the limitations that are put on this. There are also residency restrictions. Some of these may be limited to people who are already residents, or you have a history of residency in a city or county. I worked with one set of clients who hadn't lived in the city for two full years and they weren't eligible for some of the grant programs that the city. The next is gonna be credit minimums. You'll most likely need fairly good credit. A few programs will go as low as 620 FCO score. Most are gonna require six 60 or six 80, and sometimes even over 700 to really get enough buying power for this to make sense. There might be programs out. But there'll be very few that are gonna allow under a 660 credit score. I only have one of those programs, and you have to have at least six 20 the next one many times. But not always. You need to be a first time home buyer. That usually means you haven't owned a home for at least three years. There can be employment or demographic restrictions or benefits. Some underprivileged groups may get preferences, some types of employment like first responders, firefighters, police, those in the medical profession all typically can take part in these programs. As far as the programs themselves, they'll usually pay 2%, three and a half percent percent, or up to 5% of your down payment and closing costs, and there are some program. That pay up to 20%. So let's talk generally about each of these. And again, I'm not talking about any specific program, kind of lumping them together, just so that you can get a general idea of how this works. You're definitely gonna want to talk to a loan officer and do some extra research if you're interested in doing down payment assistance. But let's start with the 2% programs. The 2% programs are more of an assistance than outright paying your down payment or closing costs. It's really about closing the gap. They're in place to help you with making up the difference between what you've saved and what you'll owe. These 2% programs tend to have more favorable interest rates, and often their payback schedules are more flexible. There is less risk involved for the lender. And this is typically to help cover closing costs. So your home usually has some equity in it already, so the interest rates and fees and things like that are better than some of the other programs. Three and a half percent down payment programs help those that have a little. And this covers the cost of the down payment on an FHA loan or to cover the cost of down payment while receiving seller credits or gift funds for the closing costs. And this is a pretty common scenario that I've been seeing. You'll see a higher interest rate on these loans that helps offset the cost of the down payment. But if you're able to get the seller to help cover the cost of your closing costs, you may not really have to come with much money out of pocket, maybe a few thousand dollars in one program I. The three and a half percent is given at about 1% higher interest rate than your standard loans interest rate, but the grant is forgiven after only six months. That means you can refinance or just note that the money is no longer owed. 5% down payment assistance programs can cover both closing costs and the down payment on an FHA type loan. These are less common. They're typically more difficult to come by, have more restrictions than many of the other programs, and typically require a much higher credit. the 20% down payment assistance programs. Now I'm gonna talk about one that just launched here in California. this is here in March, 2023. This program's actually what they call a shared appreciation loan. They'll loan you up to 20% of the purchase price, which you. Have to pay back when you refinance, sell, or pay off the home. You'll also have to pay up to 20% of the appreciation on the home as well. That money then gets reinvested back into the program for future buyers. The best way to think of this program is that they'll give you 20% that you have to pay back in. There's no interest on it, and then you get to keep 80% of the profit you make from the home sale. It's a great way to have. Either full down payment with closing costs paid or to have 20% down payment so you don't have to pay mortgage insurance. This should help many buyers who would be priced out of a loan because the down payment will help lower the principle. Meaning lower payments. Now I want to talk about a few upsides and downsides to these programs. Really think hard about whether or not this program's gonna make sense for you. So let's talk about some of the upsides less money required to buy a home. Right? So this is the big obvious one. You don't have to have a full down payment saved to buy a home Down Payment assistance programs can help you cover the full cost of the down payment and closing costs, which is especially beneficial. For first time home buyers who may not have a lot of money saved up, or you can't use the equity you've earned from a previous home sale to help you with a new purchase interest rate and payback schedules, right? So these programs may offer favorable interest rates and have flexible payback schedules making them very advantageous, especially for lower income buyers. Some programs actually give more money or have better rates for those at specific income levels. Below the county average refinancing. In many cases, you can refinance your loan after a specified period and reduce your interest rate if the interest rates have dropped and not have to pay back the down payment. In some programs, a one-time refinance is allowed, even if the down payment loan is on a 30 year term, meaning you could refinance, get that lower rate, and you don't have to worry about that second mortgage that's on there. These programs can give you more buying power. With program like Cal Hess, 20% down, you may find yourself with more buying power at the same monthly payment, allowing you to buy when you may have been priced out before. Now there's always gonna be some downsides, right? Just like everything, weigh your options and see what makes the most sense for you. So some of those downside. Limited funds. Many of the state and county programs have funding limits. They have a set amount at the beginning of the year, and when those are used up, you have to wait till the next year till they refund. Once that funding runs out, the programs are put on hold until the next round of funding. You do have less housing flexibility. Many of these programs have occupancy restrictions, nearly all require you to be the primary occupant, so you can't rent the home or buy it as an investment property. You usually cannot have a co-borrower on the loan either, who will not be occupying the home. This means you can't have a family member cosigned who isn't planning on also living there. Some programs will require a full payment of the grant or loan if you move within a specified time period, which could be as little as five years. So if you aren't stable and where you'll be living long term, maybe your career. Then you may find yourself having to pay back the entire down payment after selling. There's a lot more paperwork. These loans often take longer to process, and many times they have to go through multiple rounds of underwriting. The first like your normal loan, and the second with a down payment assistance program. Because of this, there can often be delays in closing, and I've seen these take as long as 45 days when a normal escrow is about 30 days. One of my 3% down programs. However, it can be done in three to four weeks, which is standard on an FHA type loan. Your offers may look less qualified when you submit an offer. The seller's gonna be looking for the most qualified buyer. Unfortunately, with down payment assistance programs, you may not be seen as the most qualified buyer because of the additional p. Potential delays in closing, along with knowing that you don't have the funds to pay for the down payment or all of the closing costs. Those with high earnest money, high down payments and shortest terms, often went out simply because they're making a stronger offer. In a highly competitive sellers market, this could be a huge disadvantage. This is where it's vitally important to have a lender who understands down payment assistance and a real estate agent who can make sure that the seller's agent understands the process and situation to make sure that they take your offer seriously. I wanna talk a little bit about how you get down payment assistance. Most government housing agencies offer some sort of program, so it's worth exploring what's available in your area. Your local HUD office should have more information about these types of programs and eligibility requirements for each one. Definitely check with your county in city two in order to see if they have any resident programs. Most lenders are gonna have down payment assistance options, so make sure to speak to your loan officer, ask them what types of scenarios are available for you, but make sure that you get a lender who understands the process and can explain it to you so that you don't find yourself in over your head. When you're buying a house, you'll need to fill out a normal loan Applic. Have your credit run. That will always be important as your loan officer will use that information to help determine which programs you may be eligible for. Income, credit, and location are all important factors and down payment assistance programs, so be sure to let them know what areas you're looking at. You could even give them some example homes and they can look to see if those would align with these programs. So, , you are asking yourself, should I use down payment assistance? Well, I think it's a great thing to do. It's not for everybody, but if it's the difference between you buying a house or not, I definitely think it's something to look into Down. Payment assistance programs are a great way to buy home when your funds may not be enough for the lower three and a half percent FHA down payment plus closing costs. You'll want to make sure that you understand all of the rules and potential downsides. And make sure that the program offers enough flexibility for you in your future plans. I found these programs to work really well with those who have good jobs, good credit, but are just struggling to put enough money away for a sizable down payment with all of the rising costs we're seeing. This may also be a great program for someone who has the down payment but isn't quite there yet with the closing costs and using this to make that gap up so that they can buy a home today instead of waiting 3, 6, 12 months to save up for those extra closing costs as home prices continue to go up. Being priced out of the market because you don't have enough of the down payment, shouldn't stop you. With the right income and. There's likely a down payment assistance program out there that can help you. I hope this has helped make you feel more confident in down payment assistance programs. Feel free to reach out if you've got any questions. Want to know more about some of the programs that we offer or can maybe. Connect you with someone in your area who does down payment assistance. Head on over to ft hb pros.com. We've got all of our podcast episodes available, articles, newsletters, resources, along with our Facebook group where we've got different lenders and agents all there to help answer your questions. So thank you again for your support. Happy home buying.