Many people are curious about Down Payment Assistance (DPA) programs when it comes to buying a home. In the mortgage industry there are a good number of options for these programs depending on where you are (geographically), and how much you make (most DPA programs are created to assist low-to-moderate income buyers, typically defined by county).
DPA loans have taken a bit of a backseat in the last 1-2 years though (mainly due to how competitive the market was) and some programs even stopped entirely (due to market volatility).
With the market “softening”, we are starting to see a few of these programs come back into frame, so we thought it would be good to review the pros & cons of these programs.
- Substantial Assistance: 0% – 5% (sometimes 10%) of purchase price available to cover down payment / costs / prepaid items
- Low FICO requirement: 640 is the typical benchmark. It’s a “pass or fail” test, so there aren’t typically pricing adjustments for lower FICO scores (as the case with most non-DPA loans)
- Don’t have to be a first-time homebuyer: some DPA programs don’t require this
- Time Restrictions: most DPA programs require you to keep the loan for 3-5 years. If you sell or refinance before that time, you may have to pay back all / some of the assistance
- The Cost of Borrowing is Higher: you pay all the loan costs you would if you were going without DPA, as well as additional fees for the DPA program (i.e., 1% loan origination fee, compliance / admin fee, funding fee, tax servicing fee, etc.). On top of this, the interest rate on DPA loans is typically higher (depending on DPA program, and assistance amount given). The higher rate is simply how most DPA programs subsidize.
- They aren’t typically “no-money” loans: to use a DPA loan and truly not have any money out of pocket, you may need a seller to give you a large amount of seller credit / concession (typically negotiated at time of contract)
- Property restrictions: some programs do have limits to what type of property you can buy (manufactured homes & condos may be ineligible)
Summary: DPA programs can be beneficial, but like any tool, only when they are used correctly. For most buyers, avoiding DPA programs (and instead providing their own down payment through personal funds or gift from family / friends) is typically the best solution (and the lowest monthly payment).
If a discussion about your scenario is beneficial, please don’t hesitate to reach out.