May 27, 2010 Down Payment Assistance Programs (DPA’s) for First Time Home Buyers By Michael A. Foote, CMB
There is money available for first-time homebuyers today. Down much-needed distance programs are available again in a much-needed addition to financing products available today. Down Payment Assistance Programs are generally local, state, or federal grant or bond programs designed to assist certain persons with certain income levels in certain areas, with money that can be used for the down payment and closing costs on many purchase loans.
These tax-free grants or loans are generally forgivable, provided the buyer stays in the home for a time. And these dollars can dramatically change the amount of money required for closing when these first-time homebuyers buy a home. For example, a typical FHA borrower may have to come up with over 4-7% total of the sales price, whereas a borrower with a WISH down payment assistance program may only need to bring in 2-3% total. That’s a tremendous amount of money on several hundred thousand dollar transactions. If you amortize that difference, the savings are tens of thousands of dollars since most closing costs are financed in the new mortgage.
So what does the process with “DPA” look like when compared to the traditional loan process. It seems less to the user that the lender will generally have to deal with the additional hoops during the process. The borrower/buyer probably wouldn’t know the difference. The only real difference is the potential for a slightly longer loan processing time. So is DPA a good idea? Well, lately, it has been a challenge for Realtors to get clients using FHA, let alone FHA WITH Down Payment Assistance, so an argument could be made that using DPA on an Offer to Purchase could be a determining factor for the seller’s side when these choose the offer to open escrow with. The only cure for this pitfall will need to be more productive on the market for properties up to the $400,000 range as DPA generally has no purpose and no qualifying borrowers as the sales price rises and in areas of high per capita income. Undoubtedly, DPA has a place in today’s financing landscape, and those in the industry are happy to have it; it is another additional tool to increase homeownership for low to mid-income families. And this product will help sell the forecasted shadow inventory rumored to be lurking around the corner.
Only time will tell if that will come to fruition or not. These programs are not free from abuse, there have been scams related to DPA, and officials, lenders, and large institutions have scaled back what is allowable as DPA. Also, economics plays into the availability of these all the time. There are many DPA’s wholly drained of funds.