Can you qualify to buy a home now? Many renters actually have the income and credit qualifications to buy a home, and simply need to overcome the down payment hurdle. Too often, myths about home buyer programs can hold you back.
If you’re considering buying a home, you’re probably in deep in research mode right now. In fact, most home buyers do significant online research before engaging a lender or agent. And, if you’re here, you are likely researching about the down payment options for your new home purchase.
Home prices, along with down payments, are increasing, but down payment assistance programs can help make buying a home more affordable. We’re breaking down some of the most common myths about home financing and down payment programs.
Down payment assistance programs are only for first-time home buyers.
Nope, not true. First of all, the majority of programs use HUD’s definition of a first-time home buyer: that is, someone who has not owned a home in three years. So, if you are someone who owned before, but are currently renting, you may be a first-timer again!
Not all programs specify that you must be a first-time homebuyer. Make sure you don’t rule yourself out.
One thing that’s true for all programs? They are for owner occupied home buyers, not investors. Most housing agencies will require that the home is occupied as a primary residence in order to qualify.
In addition, homebuyers purchasing a home in a designated target area (typically for revitalization efforts) may receive special benefits such as higher assistance amounts, more lenient income requirements and the first-time homebuyer requirement may be waived. Veterans are often eligible for a first-time homebuyer waiver, too.
Assistance programs are no longer funded.
On the contrary. We found that more than 87 percent of all programs we track have funds available for home buyers. In fact, there are hundreds of millions of dollars in down payment assistance, grants, tax credits and affordable first mortgages available throughout the USA.
Each program has a different funding schedule. Some programs are government-funded and are provided through municipal or quasi-government agencies or non-profits. Others are privately funded, and some are even sponsored by employers. Every state has a collection of programs at the state-level and hundreds of markets around the country offer local assistance as well.
It’s difficult to qualify for home buyer programs.
Truth: There are many options and opportunities. The only difficult task used to be identifying what programs might be a fit for your situation. The key is doing research early in the home buying process as well as reviewing the application criteria.
To qualify for an assistance program, both the home buyer and the property must meet certain criteria, which vary by program. Standard criteria include property location, type of home, sales price, household income, and home buyer education certifications. There are often additional benefits, or even entirely separate programs, for educators, protectors, healthcare workers, veterans and households with disabled members.
Homebuyers must also demonstrate that they are financially responsible. Assistance programs have credit score thresholds and cash reserve requirements. Most programs will require a little money down from the homebuyer, as well as homebuyer education, especially for first-time homebuyers, to ensure the long-term homeownership success of each new buyer.
Down payment assistance programs makes home financing more difficult.
Here’s the deal–your home purchase is likely the largest purchase you will ever make in your lifetime. So, you want to get it right and make a wise financial decision, right? When you apply for and use a down payment program, it does require additional paperwork, however the paperwork is similar to what you are already doing when applying for a home loan.
Interview lenders to find someone knowledgeable about the programs in your area and willing to work with you.
Lenders who can offer these programs are called “participating lenders.” They are qualified to write the loans associated with the programs and understand how to incorporate this special financing into the home loan without complicating or prolonging the real estate transaction. This is why it’s important for to seek information about available programs prior to touring homes or even getting pre-qualified. A little homework upfront will ensure a smooth, successful transaction down the road.
Down payment assistance is only for inexpensive homes.
Don’t let preconceived ideas about programs throw you off. Down payment programs aren’t just for narrowly defined home buyers and “targeted” neighborhoods of very inexpensive homes. In fact, homes in any neighborhood may be eligible with sales price limits typically ranging from $200,000 to over $700,000 in high-cost markets. In a report we saw from RealtyTrac, we found that 87 percent of homes are eligible for one or more programs.
Some home buyer programs can have income limits of up to 120 percent of the area’s median income (AMI) and higher, which can amount to well over six-figure incomes in countless markets across the country. In addition, some may offer tiered assistance dollars at varying income levels so higher incomes might yield lower assistance amounts, but higher income isn’t an automatic disqualifier. Income limits are almost always based on household size, so limits for a family of five are significantly higher than for a single person.
Down payment assistance is only compatible with FHA loans.
While FHA loans are the most common to use with down payment assistance, it doesn’t mean other loan products are off the table. FHA has more flexible down payment requirements than some other loans so it may be a good fit. Many down payment assistance programs are also compatible with VA, USDA and conventional loans.
How do you know what’s the best fit? It really comes down to purchase price and assistance amount. For example, if you have $5,000 in down payment assistance on a $150,000 house, that’s just under FHA’s down payment requirement of 3.5 percent, so you would need to come up with a little extra to complete the down payment requirement.
However, if you have $10,000 in assistance on the same $150,000 house that brings you to more than 6 percent down and may open the doors for conventional financing, helping you reduce your mortgage insurance and fees. Keep in mind there are many other factors, including veterans who don’t have a down payment requirement and buyers in rural areas who can use USDA loans.
Down payment assistance programs require longer closing timelines.
It’s true that some of these programs may take a little longer than a typical loan to underwrite, approve, reserve funds, and deliver closing documents. However, the closing timeline must be measured from the date the full down payment assistance application is submitted, not when the opportunity is first discovered. That’s where the misconception lies.
So, do yourself a favor and research these programs early. By completing homebuyer education courses and other requirements upfront, you are shaving off that time. Bottom line: you’re trading a little extra legwork to gain immediate equity and retain some of your savings.
Housing agencies who provide these programs should be considered partners and subject matter experts. Ask your agent agent or lender to keep you informed during the process so you meet your timeline expectations.
Down payment assistance dollars are never forgiven.
Every market in the country has some type of down payment help. There are a variety of programs available, including some that defer payments or interest and others that offer grants or forgivable loans.
First, it’s important to understand how programs work. Nearly every down payment assistance program creates a lien on the financed property, just like the first mortgage. Homebuyer programs take a subordinate second or even third lien position.
But, not all programs have to be repaid. Grants are typically structured as gifts that do not have to be repaid. The grant funds are delivered to you at closing. Grants that do have to be repaid will typically waive the interest and defer payments. This provides a unique upfront buying power and opportunity for homebuyers.
With deferred loans, payments are often postponed for the life of the loan or grant, with 0% interest, and then the loan is forgiven after a certain number of years as long as you live in the property. Other programs may defer all payments and interest, or never charge or accrue interest, and use proceeds from a sale or refinance to “pay off” the lien.
Some programs do require the loan to be paid back upon sale of the home. These programs still give you an opportunity to get into a home that may not have been affordable or possible otherwise. That’s especially important in markets where rents are quickly on the rise.
Sellers won’t accept layered financing.
Are you worried the seller will balk at a contract with financing beyond a typical first mortgage? While that might happen, we also know sellers also want to sell their home…for the best price. The real issue at hand is the fear of longer closing times or complicated closings. Sellers may have heard cash offers are better because they’re quick and will cost them less.
But, is cash really better?
Consider that buyers with down payment assistance are actually coming to the table to extra funds (and more to bargain with), allowing them to compete with other buyers on price and seller-paid costs. It also means the seller doesn’t have to take a lower offer to sell faster to a more aggressive (and less common) cash buyer. In fact, down payment assistance may cover items like closing costs and other seller-paid costs, allowing the seller to gain even more. When agents and sellers open their minds to buyers taking advantage of home buyer programs, it can help all parties involved.
In order to improve the timeline and reduce any seller fears, you should complete home buyer education early, submit loan documents to the lender promptly and do you part to expedite the process from the beginning.
It’s advantageous for buyers to put down more of their own money for a bigger down payment.
This myth is largely the result of the poorly documented, subprime loans of the past being incorrectly compared to down payment assistance programs. Today’s programs come with prime loans and required home buyer education. We know the biggest hurdle to homeownership is the down payment — it can sideline buyers who have the income and credit to buy a home. Maybe that’s you. Instead of waiting it out and crossing your fingers for a low interest rate and favorable home prices in the future, these programs can get you in a home much sooner.
Sustainable down payment assistance programs give you a chance to retain some of your savings for long-term homeownership success. These programs also help current homeowners because it aids in neighborhood revitalization. Plus, during the application process, you learn about the responsibilities and expenses of homeownership, including appliance repair, yard upkeep, heating and air checkups, home budgeting and much more.
With down payment programs, you don’t have to leave to put every last penny towards a down payment, leaving you “house poor.” Instead, you can move in with a financial cushion in place, some skin the game, and critical homebuyer education under your belt.
In fact, that’s why delinquency rates on these loans are actually lower than that of the general market. Studies from the Government Accountability Office (GAO) and Harvard’s Joint Center for Housing Studies indicate the delinquency rate on loans using down payment assistance programs is far below subprime delinquency rates, and even lower than market standard FHA delinquencies.
And, in a new analysis, the Urban Institute concluded that state HFA down payment assistance loans are net present value positive, not negative, to the FHA insurance fund.
That wraps up our top 10 down payment assistance myths. Compliments of down payment resource.
Contact us and we can see which program you are eligible for.