Down Payment Assistance

Over the years a variety of down payment programs have made their way into the market.  The most popular of these programs came into existence in the early 1990’s.  Today we refer to this program as a “seller paid” down payment assistance program.  This program can be used with a variety of loan types, but most often will be used in conjunction with FHA loans.  The seller paid down payment assistance program is designed to allow a seller to contribute funds to a non-profit organization on behalf of the borrower.  The down payment assistance provider would then contribute these funds as a gift to the borrower, to be used as a down payment on the property.  In order to complete this transaction the down payment assistance provider will collect a small fee for the services.  The fee collected will normally range between $350 and $550.  I always joke about this process, because it represents a legal way to launder money.

These “seller paid” programs were accepted by lending institutions throughout the United States until recently, when President Bush signed the new $700 billion dollar mortgage “Bail Out” program.  In accordance to the details outlined in the mortgage “Bail Out” program certain corrective measures needed to be taken in order to prevent any further issues in the mortgage markets.  One of these corrective measures called for an immediate termination of any programs working in connection with “seller paid” down payment assistance.  The decision on whether or not to eliminate these programs did not come easy, and was heavily debated among members of Congress before the final decision was made. 

Even today, there are still a number of proponents for “seller paid” down payment assistance who have been actively lobbying Congress to take the appropriate steps needed to have these programs reinstated.  We believe that eventually these programs will be reinstated; however, for the time being, this option will not be available.  Congress debated this issue for a long time before making the decision to eliminate the DPA programs.  Their argument outlined one report after another which showed that a large number of qualified borrowers who sought to receive down payment assistance were in fact among some of the biggest contributors towards today’s growing default rates found in mortgage-related products.  These reports revealed that statistically a borrower who had received down payment assistances were five times more likely to default on their loan, than those who did not receive any assistance.  Congress, faced with pressure from public opinion, needed to take immediate action and include portions of the bill tied to correcting the financial systems as a whole.   They simply did not feel that the benefits from the programs outweighed the costs currently being paid by thousands of people who are facing foreclosure on their homes today. 

The good news is that there are still some options available.  Today, you can either apply for a grant from your local county or you can participate in the HUD $100 down payment program.  Both programs have limitations, but they will give you an excellent alternative from having to come up with a 3% - 5% down payment on your own. 

HUD’s $100 down payment program has produced a great amount of attention.  Due to the growing number of foreclosed homes, HUD has developed a program that allows you to purchase one of their foreclosed homes for as little as $100 down.  You can find these homes by logging on to HUD’s website directly or you can visit my site at www.onlinemortgagebank.net and click on the HUD homes icon.   

In order to qualify for the program you will need to have your bid accepted by HUD on one of the homes that has the $100 HUD home designation.  Once your bid has been accepted, HUD will require you to obtain an FHA loan.  Because FHA loans only require a 3% down payment, they provide the best option for minimizing your down payment requirements.  HUD will give you the 3% down payment required on the FHA loan as a contribution for selecting one of their foreclosed properties.  Obviously, HUD’s reasoning for offering a program like this is to help deplete the number of foreclosed homes currently in inventory. 

 You can also ask HUD to pay a portion of your closing costs in addition to the 3% they have already contributed towards your down payment requirements.  In fact, FHA loans will allow a seller to contribute up to 6% of the total sales price, which can then be used by the buyer to pay some or all of their closing costs.  Because FHA loans only require 3% for your down payment, you can use the remaining 3% for your closing costs.  Obviously, you will need to ensure that you are making an appropriate offer to HUD, which will allow them to justify a 6% seller contribution back to you. 

The second alternative used for down payment assistance involves special grants offered through the city and the county bond programs.  Local and state government entities throughout the U.S. have set aside funds, raised in a variety of ways, to help low-to-moderate income families with their down payment needs.  The homeowner will simply need to meet the minimum requirements to qualify, and if they do, they will be provided the funds for their down payment needs.  These funds are typically limited to 3%, which makes the FHA product very attractive for these types of programs.  You can talk to your realtor about which bond or grant programs are available, but if you log online and do a quick search on this topic you will be able to find the information you need.  You will need to include your city or county in the search in order for you to find the programs specific to your area.   

City and county bond programs are not the only bond programs that allow down payment assistance.  Mortgage providers can also sign up for sponsor paid bond programs.  Every year, these bond providers will ask a number of mortgage companies to make an upfront contribution to help support their bond programs.  Once a contribution has been made by the mortgage company, they will become eligible to help determine who qualifies for the sponsor paid bond money.  In essence, the mortgage company will have access to a predetermined amount of bond money to be used for down payment assistance.  Once these funds have been used up their eligibility to approve sponsor paid bond money runs out until the following year.  Most of these programs run on a cyclical term, beginning around March and ending whenever the bond funds are all used up.  The longer you wait the harder it becomes to find a lender that will still have these bond funds available for you. 

Finally, we should consider ways for you to come up with your own down payment.  HUD’s $100 down payment programs may not always be available, and most bond programs run out before you even have a chance to find them.  So, in short, having your own funds will eliminate the risk you take when trying to find someone else to assistance you with your down payment needs.  Finding ways to come up with your own down payment can be a difficult task, but I have compiled a list of best practices used by other clients that might help you find the funds you need.

1.  Ask to borrow some money from a family member.  You can actually use the proceeds from a family member immediately as long as we can document the funds with a gift letter.

2. Go to your bank and apply for an unsecured loan.  Most people commonly refer to this as a “signature loan.”  The drawback is that the loan will appear on your credit and will therefore be used to calculate your debt-to-income ratio. 

3.  Sell something you already own outright to help raise funds.  This is not one of my preferred ways to raise money, but in certain situations can be helpful.  Garage sales, jewelry sold on consignment, eBay, pawn shops, flea markets, and newspaper ads are all acceptable ways for you to sell items you already own.

4.  Find a temporary 2^nd job.  There are a lot of people in the U.S. that get 2^nd jobs to help raise funds for different needs.  Working a 2^nd job long enough to raise the necessary funds can help generate the funds expected for your Down Payment needs.

5.  Find a less expensive home.  If the home you are looking at purchasing exceeds the amount of money you have for your down payment, then choosing to go with a lower-priced home may be your best alternative.  Obviously, as you decrease the price of the home you also decrease your down payment obligations.

6.  Use a combination of any of these choices.  You might be in a situation where you already have some of the funds, but lack the remaining balance needed to satisfy the minimum investment requirements.  So, if you can borrow a little from family, sell a few items, and finally lower the search price of your home, you may still be able to raise the Down funds you need for your Down Payment. 

Payment Assistance is a very hot topic for home buyers today, but if you plan out your strategy far enough in advance you will be able to overcome any issues you might have in this category.