Are There Any Risks With Using Down Payment Assistance?
Get the Facts
I’m sure you’ve heard it from parents and mentors your whole life…”If it sounds too good to be true, it probably is”. So then, how are we supposed to look at the mouth of the gift horse of downpayment assistance programs? Is there reason to be skeptical? Is there a “catch?”.
As with anything, you should do your homework and gather all of the information you can, so that you can make an educated and informed decision. There is always risk, and there is definitely reward.
Your loan officer’s job is to present you with all of the facts, and all of your options, so that you can decide for yourself if the reward outweighs the risk.
If it sounds to good to be true…..
Types of Homebuyer Assistance
Homebuyer assistance comes in many flavors. When we say homebuyer assistance, most of these programs can be used for either down payment, or closing costs, and sometimes they can only be used for one or the other. It is important that you understand how the assistance can be applied to your home buying costs so that there are no surprises at the closing table.
The most common types of homebuyer assistance programs are:
- Silent Second Mortgage
- Homebuyer Grant
Silent Second Mortgage – These programs may or may not have an interest rate tied to it, but never a monthly payment. The reason why they are called “silent second” mortgages is that there are no payments due for the life of the first mortgage in most cases. These assistance programs do create a lien against the property, and usually require that you pay them off if you sell, or refinance the home in the future.
Homebuyer Grant – Grant programs will not create a lien against the property and are not expected to be paid back. There is no interest rate, and no payments associated with a grant as well.
Buyer Assistance Breakdown
There are many types of downpayment assistance available. Many Cities, and Counties will offer downpayment programs. Most States will have a State Housing Finance Agency that will offer assistance programs to anyone buying throughout the entire State.
These programs often have very common traits that will be common across the board. Some of the more common features of buyer assistance programs include:
- May or may not require that you be a first time buyer
- Minimum credit scores
- Maximum loan, or purchase price limits
- Maximum income limits
First Time Homebuyer Requirement – The definition of a first time homebuyer for almost all programs is that you cannot have owned a home in the last 3 years. First time homebuyer programs will typically require that you submit your last 3 years of tax returns. This is to check to see if you are claiming mortgage interest on your tax return.
Minimum Credit Scores – Buyer assistance programs are not typically used to help marginal buyers enter the housing market. The exact opposite is actually true, because there is assistance, and the borrower has less “skin in the game”, requiring a minimum credit score is one way the program can reduce risk. Minimum credit scores for most programs tend to be between 620 and 640, but will vary between all programs.
Maximum Loan or Purchase Price Limits – Loan and purchase price limits go hand in hand with income limits in most cases. The goal of homebuyer assistance programs is to help low to moderate income homebuyers afford the high cost of both downpayment and closing costs required to purchase a home. Income limits will most likely the limit the amount you can qualify for.
Maximum Income Limits – Income limits can vary quite a bit based on the County you are buying in, and even how many people will be living in the home. In some cases, this income is calculated in different ways, and can include income that you cannot use to qualify for the loan, but still receive. An example of this would be income from a part time job, overtime, or bonuses that you do not receive consistently enough to use for qualifying for the purchase money loan.
Homebuyer Assistance is NOT Free Money
The single most important thing to remember is that downpayment, or closing cost assistance is never free money with no strings. It is very common that downpayment and closing cost assistance programs come with higher interest rates, and higher fees.
This comes down to weighing the risk against the reward. In most cases, it’s a small investment to put you in a position to buy a home. Most assistance programs will cover the higher closing costs of the program, in addition to paying part, or all of your downpayment.
Most homebuyer assistance programs have attractive benefits like zero interest rate, or forgiveness after so many years, or even an assistance grant that is neither a lien, or silent mortgage. As long as you know that this assistance can, and in most cases will come at some cost, you can prepare yourself for what comes after the purchase of your new home happens.
City and County vs State Assistance Programs
The most dangerous features of some of these buyer assistance programs can be found in the details. It’s not that any of these programs are actually bad, or dangerous for you as a homebuyer, but if a feature of the assistance sneaks up on you when you least expect it, it’s not a pretty sight. Here are some examples:
City and County Programs – It is not uncommon for City and County programs to have the most limited funds, and ironically, usually some of the most “unbelievable” assistance opportunities. It is not uncommon to see a City or County program offer tens of thousands of dollars in downpayment assistance. This money almost always has a catch. Common features of “high payout’ City and County assistance programs include:
- Waiting lists, or restrictions to only certain properties
- You may not be able to apply for assistance until you have an offer accepted
- You may be required to have a certain amount of your own funds in the transaction
- There is often an equity share feature that entitles the City/County to a portion of your earned equity
- They can run out of money at any time
Statewide Programs – It is not uncommon for local, City and County programs, to be much more restrictive than Statewide assistance programs. I recommend that you always compare local programs to Statewide programs. While Statewide programs might not be as attractive in terms of the amount of assistance they offer, they are often much easier to qualify for, do not have limited funds, and can be used to buy any property as long as you meet the qualifying guidelines.
Protecting Yourself Against Surprises
There are some very simple steps you can take to protect yourself against surprises after you’ve had an offer accepted on your dream home:
Work with an experienced assistance specialist. Make sure your loan officer has used the assistance program before, and if they have not, make sure they experience with similar assistance programs. While many of these programs can be unique to the area where you are buying, most assistance programs have very similar traits and requirements.
Do your homework. Get as much information about the assistance program as you can either online, from the assistance program website, and from your lender. Ask lots of questions, and make sure that you compare all of the available programs that you might qualify for based on your debt to income ratios, credit score, purchase price, and income limits.
Compare assistance programs. If you qualify for one program, you may also qualify for other programs that use income, credit scores, and purchase price limits as the most common criteria for qualifying. If you are looking at a local, City or County assistance program, also inquire about State assistance programs.
With a little bit of due diligence, some reading, and asking a lot of questions, you should be educated and empowered to make and informed decision about using down payment or closing cost assistance programs when you purchase home.