Down Payment Help Is Everywhere. Why Aren’t More First-Time Buyers Using It? | Mortgages
Key Takeaways
- An analysis from Urban Institute and Down Payment Resource found that 79.8% of Federal Housing Administration purchase loans were potentially eligible for down payment assistance.
- Only 16.9% of FHA purchase mortgages used government-sourced down payment assistance, according to data from the U.S. Department of Housing and Urban Development.
- Down payment assistance can help with up-front expenses but may come with trade-offs, including second-mortgage repayment and program restrictions.
Saving for a down payment is a major obstacle to homeownership for many first-time homebuyers, especially as they juggle closing costs and face elevated home prices and mortgage rates. Down payment assistance is widely available, but many buyers who could qualify don’t receive help.
Many Buyers Qualify But Don’t Use Down Payment Assistance
Some buyers don’t realize down payment assistance programs exist or may assume they don’t qualify because they think assistance is only for borrowers with very low incomes or poor credit.
“Most buyers eliminate themselves before they ever talk to a professional,” says Mosi Gatling, New American Funding senior vice president of strategic growth and expansion in Las Vegas. “Many have income limits well above what people expect, and a buyer who owned a home years ago can often still qualify under the first-time buyer definition.”
Most down payment assistance programs come from municipal governments, nonprofits and state housing finance agencies, and there’s no universal eligibility standard. It’s typical for programs to evaluate based on income, credit score, purchase price, primary residence and location.
Some programs (11%) have no income limits, and many programs define a first-time buyer as someone who hasn’t owned a home in the previous three years. Some programs require buyers to use approved lenders, complete homebuyer education or purchase a home in a designated area.
“Buyers shouldn’t assume they’re ineligible without speaking with an experienced lender who can evaluate multiple options,” says Miki Adams, president of CBC Mortgage Agency in Sandy, Utah.
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What Is Down Payment Assistance?
Down payment assistance may cover some or all of your down payment or closing costs. Some programs help with mortgage rate buydowns or other up-front expenses, such as prepaid taxes and insurance. Down payment assistance can help buyers who don’t have enough saved for a down payment by reducing how much cash they need to bring to closing.
Second mortgages make up 56% of down payment assistance programs, which may be deferred or forgivable loans that reduce up-front costs. Grants don’t require repayment but are less common than second-mortgage programs.
The Urban Institute analysis found that 30.7% of denied mortgage applications might have been approved with down payment assistance.
Finding Legitimate Down Payment Assistance
Buyers interested in down payment assistance should look for programs before shopping for homes. The program rules may limit your price range or location choices, and you may need to complete a homebuyer education course. Some programs require a specific mortgage or an approved lender.
“Down payment programs should be part of your homebuying assessment, not something you bolt on after you’ve fallen in love with a house,” says Gatling.
Start your down payment assistance search with organizations that are publicly accountable or established in housing finance, including:
- State housing finance agencies
- City or county housing departments
- HUD-approved housing counseling agencies
- Local housing nonprofits
- Employer housing programs
- Mortgage lenders
When shopping for a mortgage, ask lenders which down payment assistance programs they are approved to offer and how many loans they’ve closed with down payment assistance in recent months. Also, find out if using a down payment assistance program changes the mortgage rate or fees, and if it could affect the closing timeline.
“Start with sources that are accountable to someone,” says Gatling. “If a program asks you to pay up-front fees to unlock funds, walk away. Legitimate programs don’t work that way.”
Down Payment Assistance Trade-Offs
Down payment assistance can lower the amount due at closing, but it may not reduce the total cost of buying unless it’s offered as a grant.
“The key question is not just ‘How much cash does this save me at closing?’ but ‘What is the all-in cost over the period I expect to own the home?'” says Tanya Bates, senior vice president of home loans at Bank of Oklahoma in Oklahoma City.
Buyers should find out whether the assistance is a grant, forgivable over time or deferred and whether it requires monthly payments. Some second mortgages are subject to interest even when payments are deferred, and some programs charge higher interest rates or fees.
Gatling recommends comparing full mortgage offers, not just the dollar amount. She says to ask three questions of any down payment assistance program:
- Do I repay this, and if so, when and how?
- What triggers repayment: selling, refinancing or moving out?
- And what does my total monthly payment and long-term cost look like with this program versus without it?
