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Lack of a down payment is one of the major obstacles blocking first-time buyers from purchasing a home. It can also be a challenge for those buyers who are forced to transact now but owe more than their property is worth.
Down payment assistance (DPA), however, can play an important role in addressing both of these issues. If you’re ready to help more buyers become homeowners, here’s how DPA can help.
As the new NAR rules removing buyer compensation from the MLS kick in on Aug. 17, 2024, buyer’s agents will be required to demonstrate their value to their clients. One of the most powerful ways to do this is using DPA.
Rob Chrane founded DownPaymentResource.com in 2008. Since that time, he has fought an uphill battle to help homebuyers and sellers understand not only how much money can be available through DPA, but also how DPA can help more buyers close transactions when they normally wouldn’t have qualified without it.
Editor’s note: Please remember that the criteria for qualifying for down payment assistance can be rigorous and multilayered. It’s important to work with a professional mortgage consultant who is familiar with these programs and let them find the best one for your clients.
What is down payment assistance?
Chrane defined down payment assistance as “money to help homebuyers get into a home by helping them accumulate their down payment and closing costs. Down payment assistance programs are administered by federal, state and local housing finance agencies, nonprofits, as well as some employers.”
Myths and misconceptions
Chrane cited statistics showing 41 percent of buyers believe they must put 20 percent down to purchase. In terms of the general population, 62 percent of Americans share the same misconception.
He also pointed out some other misconceptions, including that “DPA is only for low-income households, homes in distressed neighborhoods or targeted census tracts. That’s not the case.”
DPA is seriously underutilized
Currently, 87 percent of the properties in the U.S. are eligible for DPA. Sadly, only a small percentage of borrowers are taking advantage of it.
The Down Payment Resource Q1 Homeownership Program Index Report showed that 79.8 percent of FHA borrowers are eligible for DPA, but only 15 percent used it. This is a tremendous gap. If you’re representing an FHA buyer, determining if there is a DPA available for a given property that meets your buyers’ criteria is one of the best ways to illustrate your value.
Furthermore, according to the most recent NAR Profile of Home Buyers and Sellers, 32 percent of all transactions last year were with first-time buyers. Chrane said that 67 percent of these buyers would currently qualify for DPA.
Availability of DPA programs
Between 1,300-1,400 institutions provide DPA and there are 2,373 DPA programs currently available nationally.
“Providers consist of state housing finance agencies, local housing finance agencies, and local housing finance agencies, municipalities, states, and counties,” Chane said, “usually through their economic development departments with the goal of promoting homeownership down to the local level.”
The most common amount of DPA provided to buyers last year was $17,000. Chrane explained how these amounts can often be even higher.
“One way DPA can be even higher occurs when the benefit is based on a percentage of the loan amount or a percentage of the sales price,” Chrane said.
“This can be between 3 percent to 5 percent, so that can add up along with the fact that many of these programs can be layered so you can put multiple programs together.”
For example, if one spouse served in the military and then became a paramedic and the other spouse is currently a teacher, those three attributes could make them eligible for VA financing as well as DPA for “community heroes,” i.e. teachers, police, firefighters, nurses, paramedics, etc.
DPA is also available for owner-occupied two- to four-units and manufactured housing. There are between 600-700 programs that provide DPA for owner-occupied two- to four-units, as well as 800 programs nationally for manufactured housing units. These programs give buyers a wide variety of ways to get into more affordable housing.
DPA can help many borrowers whose loan applications were declined
Chrane said that on average, “DPA typically reduces the borrower’s debt-to-income ratio by 6 percent. This difference can salvage a sizable number of declined loan applications.”
In fact, his research showed that showed 31 percent of the declined loan applications could have been saved with DPA.
4 types of DPA
According to the Down Payment Resource Q1 2024 Homeownership Program Index report, as of April 24, 2024, the following categories of DPA were available:
1. Down payment and closing cost assistance (74% of all DPA)
- 81 percent of all DPA programs have deferred payments: These are second mortgages that only must be paid in full when the borrower moves, sells, or refinances.
- 53 percent are forgivable: These second loans are often structured over five years. For each year the borrower stays in the property, the loan amount is reduced by 20 percent until the entire 100 percent is forgiven after five years.
- 50 percent are forgivable loans with deferred payments: These second loans may be reduced to zero if the borrower stays in the property for the five or 10 years specified in the terms of the loan. If not, the payments on the remaining loan are deferred until the borrower moves, sells or refinances.
- Grants: Money or gifts that do not have to repaid.
- Second mortgages: Very low or zero percent interest rate loans that may be deferred or forgiven incrementally over time.
- Combined first mortgage and DPA programs: An example would be pairing a low-interest-rate first mortgage with DPA.
2. 10% are low-rate first mortgages
These can include below-market interest rates, lower or no private mortgage insurance (PMI), or up to 100 percent financing.
3. 3% have mortgage credit certificates (MCCs)
MCCs offer up to $2,000 in a tax credit (i.e., a reduction, not a deduction, off your federal income tax due.) For example, if you owed $8,000 in income tax and have a tax credit of $2,000, your tax bill will be $6,000. This program allows you to claim that tax credit for the entire time that you own the property or until you pay off your loan.
Best of all, if there is an MCC available on a given property, you can usually layer it with other types of DPA.
4. 13% are matched savings programs
Sometimes known as “Lease-to-own matching programs,” these programs are available nationally and help renters become homeowners. The potential buyer saves money for the down payment and the amount saved is matched with DPA. The Federal Home Loan Bank (FHLB) offers the following options:
- The Individual Development and Empowerment Act (IDEA)
- The Workforce Initiative Subsidy for Homeownership (WISH).
- Housing Choice Vouchers. The Housing Choice Voucher program is a major federal program for assisting very low-income families, the elderly and the disabled to afford decent, safe and sanitary housing in the private market. (This category includes Section 8 Housing.)
Where to quickly locate DPA
While many MLSs have worked with DownPaymentResource.com to provide DPA information on their current listings, Realtor.com, Redfin, and Zillow now provide DPA information on every listing on their sites where the property is eligible for DPA.
Although Zillow was the first of the portals to display DPA information, Realtor.com is currently the easiest place to search for what is available. Click on the “monthly payment tab” on Realtor.com to see what programs are available for a given listing. (Zillow makes you scroll through several mortgage tabs to locate how much DPA is available on any listing.)
When I clicked through to see the 35 programs for a condo located near where I live, it not only had all the major types of DPA described above, but it also had a mortgage certificate as well. Again, MCCs can be layered with other DPA and to provide the borrower with up to a $2,000 credit against their taxes annually over the life of the loan.
In addition to the programs available, users can also see which lenders provide specific programs. Please note most mortgage brokers are not up-to-speed on these programs, so before deciding who should represent you, make sure any mortgage broker you consider has experience working with DPA.
Zillow’s success with DPA
In fall 2021, Zillow first partnered with DPR to provide DPA information for all listings on their site.
Twelve months after Zillow put DPA on their site, Chrane said they sent out a press release sharing the following results:
- During the first 12 months that DPA information was available on Zillow, more than 1 million unique visitors answered the six eligibility questions on the site, including household income, to determine if they were eligible for DPA.
- Of those 1 million users, Chrane said that 93 percent of those users were matched with at least one DPA program.
“This underscores the opportunity for homebuyers, but ultimately the opportunity for real estate professionals, especially when these users potentially represent 20 percent of all closed transactions,” Chrane said.
Down payment assistance is finally cool!
By making homeownership more affordable, DPA not only enhances the value agents bring to the table, but it also plays a vital role in helping those who might otherwise be excluded from the housing market to make their dreams of homeownership a reality.
Bernice Ross, president and CEO of BrokerageUP and RealEstateCoach.com, and the founder of RealEstateWealthForWomen.com is a national speaker, author and trainer with over 1,500 published articles.
