As we shift from spring into summer, the atmosphere in residential lending remains stubbornly stuck: 30-year mortgage rates in the sevens, low volumes given the overhead, few, if any, products with extra profit margins, and low inventory levels of homes for sale. Originators are making every effort to turn potential clients into actual funded loans, whether done through Agency or non-Agency guidelines, and using any tools at the lender’s disposal.
For many homebuyers, one of the most challenging aspects of purchasing a home is saving up for a down payment. Granted, conventional programs can drop to a three percent down payment; USDA to zero percent. But for many other programs, if the buyer doesn’t have tens of thousands of dollars on hand for this hefty, upfront expense, lenders are increasingly offering some type of program involving down payment assistance (DPA). There are more than 2,500 programs available from state and local governments, charities, and private lenders to help a borrower meet the down payment requirements or closing costs of a particular program. These programs, often in the form of a loan or grant, have a reputation for not being as profitable as other loans. This is highly debatable, and if an originator is faced with having the client go elsewhere for their loan or funding a low-margin mortgage, putting the borrower into a DPA is very viable.
Down payment assistance programs (DPAs) are usually geared toward first-time homebuyers or low- and moderate-income borrowers to help them move from renting to homeownership and to increase mortgage affordability. Many programs follow the guidelines set forth by the U.S. Department of Housing and Urban Development (HUD). HUD defines a first-time homebuyer as not owning a home in three years, or a single parent who has only owned a home with their former spouse while married, or someone who is “a displaced homemaker” and has only owned a primary residence with their spouse, or someone whose former home was not affixed to a permanent foundation, such as a mobile home.
Down payment assistance is most often provided in the form of a loan or grant, offered by state or local housing agencies or non-profit entities, to cover part of the upfront money that the secondary markets, and therefore lenders, require to buy a house. Borrowers must first qualify for a mortgage and meet the lender’s income and credit requirements as well as DPA program guidelines. Typically, borrowers apply for down payment assistance separately, and loan officers have a chance to add value by helping their client through the process, which usually means completing a homebuyer education course specified by the program.
Most down payment assistance grants go toward qualifying borrowers’ down payments. These grants are extremely valuable because the recipient is not obligated to repay the grant. This is obviously very economical from a borrower’s perspective, and factors into the underwriting decision.
Individual Development Accounts (IDAs) or Matched Savings Programs are usually designed for low-income borrowers They allow borrowers to deposit money into a designated account and their funds are matched by the governing institution. For instance, if you deposit $1,000 into an IDA, the institution (mostly banks and credit unions or state and local governments) will duplicate your client’s deposit, so they’ll have $2,000 to put toward a down payment. Once again, this is very economical from a borrower’s perspective.
There are “zero interest” options for some borrowers in some areas. “Soft second mortgages” fall into this category and are no-interest home loans typically used toward the down payment and are forgiven after a required number of years. A deferred-payment loan is another type of no-interest second mortgage that some borrowers can use toward their down payment. These loan payments don’t kick in until your client moves, sells or refinances their home, or when they finish paying their first mortgage.
Some lenders will offer low-interest second mortgages: a home loan that buyers can use to put toward their down payment. An additional loan is an additional payment that must be made every month, but they have low interest rates.
More than 1,300 cities, counties, states, and other agencies offer down payment assistance. An Urban Institute’s survey of the down payment assistance landscape said eligible borrowers could typically qualify for $2,000 to $39,000.
The government-sponsored enterprises (GSEs), specifically Fannie Mae and Freddie Mac, have two programs that allow lenders to accept down payments in the form of second mortgages from government programs and housing nonprofits. Community Seconds is the Fannie-approved program and Affordable Seconds is Freddie’s program, both only available for the purchase of primary residences. Some state assistance programs may satisfy some CRA requirements for banks.
Another example is the Chenoa Fund Down Payment Assistance Program, a down payment assistance program provided through CBC Mortgage Agency (CBCMA), which is one of nine tribally owned enterprises of the Cedar Band Corporation. It offers a variety of down payment assistance, including forgivable loans, for Federal Housing Administration (FHA) and conventional mortgages.
If a borrower can’t get pre-approved for a mortgage, they probably can’t take advantage of a down payment assistance program. They will need a steady job, a good income, and better-than-average credit score to qualify for a mortgage. Many programs are set up to give preference to veterans or active members of the military or first responders such as police and firefighters. Others target educators or healthcare workers.
Borrowers may want to work with a lender that does not participate in DPAs. Or the client may not want to take a homebuyer education course. Not all homebuyer education programs will be accepted by all down payment assistance programs. Those offered by the State are limited to lenders approved by the State, and government funds that are available come and go depending on spending and tax revenue.
Not all homebuyers are eligible for down payment assistance, and eligibility varies by program. Each program spells out its criteria, but requirements typically cover income, home price, creditworthiness, employment, and an acceptable debt-to-income ratio. For example, many programs require that a borrower’s income be less than 80%of the local median income or have a FICO score of 620 and above.
One veteran loan officer that I spoke to said that loans to borrowers who use a DPA take a few days or longer to close, depending on the workload of the entity offering the program since staff must review the loan file once prior to closing. Or more drastically, “In my state, the sellers would not accept an offer where there was seller assistance. The state program needs work. It is overly restrictive in allowing companies to access the program, many listed companies actually do not want to do the loans, and the bureaucracy can be overwhelming.”
Another LO said, “These loans are 10 times more work: Helping the borrower is good, but it’s like getting a loan from the DMV as there is way too much government bureaucracy involved. And after taking a special course each year and being certified, LOs are flooded with calls from people who will never end up buying. It is easier to not do the program and just refer a borrower to a friend at a bank or credit union. I build up goodwill, there is much less work that way, and I don’t lose money working on loans with not enough profit in the end because of all the extra work.”
Here’s an example since it can be more expensive in terms of cost, especially for high-balance loans, as an added fee gets tacked on for those loans. “The interest rates can be competitive, and low-income borrowers get a break on the rate. It really comes down to whether the borrower needs additional assistance to make the purchase happen. These days I’ll quote the CalHFA first with a three percent of the purchase price My Home second mortgage: No payments and one percent interest accrues on the second. Due and payable upon transfer of the property, refi, or sale. There is an additional two percent of the loan amount Zero interest (ZIP) third mortgage, which brings the first mortgage interest rate up. When rates were much lower, that made sense, not so much now.
Here’s an example: a $790,257 purchase price and 97% LTV loan, today would have a rate of 6.875%/7.386% APR, cash to close estimated at $29,989 when using the 30-year fixed first loan at 97% LTV and a 3% My Home silent second mortgage at 1% interest with no payments due until events mentioned above. The low-income rate is 6.625% today and 80% of AMI or lower income qualifies for that. The first mortgage rate cost can vary but the average is 1.5%. The interest rate is around .25% higher in rate than without down payment assistance with similar points paid.
“The Dream For All is definitely worthwhile as they can use part of the 20% of the purchase price funds for down payment and closing and sharing equity at 15-20% of appreciation still benefits the buyer as the assistance has zero payments or interest. That program’s lottery closed at the end of April but is supposed to come back annually.”
For some final thoughts on profitability, we turned to Rob Chrane, CEO of Down Payment Resource. “As with all things DPA, the answer starts with ‘it depends.’ In other words, because there are several types of DPAs, the economics vary and often involve specialists in the affordable lending departments of banks and IMBs.”
DPAs are not for the casual LO user, nor for borrowers who think they are “free money.” LO and borrower education are important, as is a critical look at the numbers (as shown above). In this environment of difficult loans, and so few of them, lenders and originators having another “weapon in their arsenal” can’t hurt and may make the difference between having another satisfied client and a commission versus having them go elsewhere.
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