Down Payment Assistance Programs

Think you need a big down payment to own a home?  Think again.

A standard, vanilla Fannie Mae or Freddie Mac mortgage only requires 5% down.*  But for consumers on a tighter budget, down payment assistance programs abound!

A down payment assistance program (or DPA; we love acronyms in the mortgage industry) provides a specific amount of money to a borrower that can be used for a down payment and/or closing costs.  DPAs come in several different forms:

• The DPA could be a grant or gift that never has to be repaid.
• Some DPAs are "silent" second mortgages (meaning no payments are made) that is forgiven after a period of time.
• Many DPAs are "silent" seconds (no payments required) that must be repaid after a period of time (usually 10 to 30 years).

For example, let's say a family wants to purchase a home for $250,000.  They are considering an FHA loan which requires a 3.5% down payment or $8,750.  They may qualify for a second mortgage DPA to enable them to make their down payment.  They would have two mortgage loans:  an FHA mortgage on which they would make regular monthly payments.  And a second mortgage which would not require payments (but would still likely need to be repaid, usually when the home is sold or the first mortgage is refinanced).

But hold onto your hats!  DPAs aren't for everyone.  These programs are intended to help low- to moderate-income consumers become home owners.  Most DPA programs come with income limits.  If a buyer's income exceeds a certain amount, they won't qualify for assistance.  In Jefferson County, income limits range from $70,000 to $145,000, depending on the specific program.

And while the underlying first mortgage is a standard FHA or Fannie Mae loan, it will probably come with a higher interest rate.  When using a DPA, first mortgage interest rates are typically 0.25% to 0.5% higher than their non-DPA counterparts.

In other words, if you have the money for a down payment (or a family member is willing to gift you the funds), go ahead and use it.  I usually only recommend down payment assistance programs for consumers who truly have no other options.

Thinking of purchasing an investment property and contributing to the local rental pool?  DPA programs can only be used for the purchase of a primary residence.  But if you already own a home, you could convert your existing residence into a rental and use a DPA to purchase a new primary residence.  You DO NOT have to be a first time buyer to utilize a DPA.  New guidelines allow you to own other property.  You can even use the anticipated rental income to help you qualify.

* owner occupied, 1-unit, single family residence