With home prices on the rise since the market crash of 2010, many markets have put home ownership seemingly out of reach for would be home buyers. While home prices in many markets have risen 5-10% in recent years, income increases have, in general, not kept up. In fact, most incomes have only climbed 2-3% per year, making owning a home more expensive as a percentage of total income for households. Even then, monthly payments for many borrowers aren’t the biggest hurdle, especially since rents have also climbed with home values. For most renters that would like to be buyers, in expensive markets, the down payment is often the problem.
In a market with median home values in the $900,000 ballpark, like our local San Ramon, CA market, a 10% down payment would be a whopping $90,000! But here’s an even bigger problem – a common misconception in the housing market is that home buyers believe they need 20% down! The truth, though, is that the down payment shouldn’t be a barrier to home ownership! While some jumbo loan markets require a larger down payment, in most cases a first time home buyer needs 5%, 3%, or even ZERO PERCENT down to become a home owner. This is thanks to low down payment loan options like conventional loans, FHA loans, and down payment assistance programs.
Down payment assistance mortgage programs help borrowers qualify for home ownership by providing either loans or grants that cover a required down payment amount. In some cases, these programs cover both down payment AND closing costs, effectively allowing a borrower to qualify for a home purchase with zero dollars out of pocket.
Is there a downside?
With down payment assistance mortgage loans, borrowers will often see a slightly higher interest rate on their mortgage loan, and if the down payment assistance comes in the form of multiple liens (a 2nd or 3rd mortgage), there may be restrictions on refinancing down the line. Requirements to qualify may also be more restrictive than general FHA or conventional loan programs – for example, conventional loans often get approved with debt-to-income ratios (DTI) up to 49.99%, and FHA loans can be approved with even higher DTI – but many down payment assistance programs will limit DTI to 45% or in some cases even lower. That means that a home will be able to take up less of your overall budget when using down payment assistance mortgage products, BUT overall, this is a safety parameter that helps prevent home buyers from overextending themselves.
What kinds of down payment assistance mortgage programs are there?
There are many options for those seeking down payment assistance (DPA). From local government grants to nationwide DPA programs, there are often several options to help a buyer come up with a down payment. Some grant money comes with restrictions, too, such as repayment due upon resale or refinancing within a certain period of time. Others come in the form of no- or low-interest 2nd or even 3rd mortgage liens that need to be repaid upon resale or refinance. Some are forgivable after a certain amount of time.
The right down payment assistance mortgage program will vary depending on area, and some are only accessible to some lenders – so it’s important to work with an experienced and professional mortgage lender to ensure you’re presented with all of the options and the best route for your home buying needs. Most importantly, keep in mind that a down payment shouldn’t prevent you from pursuing your dreams of owning a home.
Questions about down payment assistance mortgage options or anything else real estate related? Give us a call today or ask an expert here!