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One of the hardest feats of home ownership is having enough money up front for a down payment, especially when house prices are soaring. And it’s even more difficult if you’re a first-time buyer or if you’re on a tight budget.
A down payment can easily be as high as $ 10,000 or more, in addition to the required cash reserves, deposits and money for closing costs. For example, if you buy a house for $ 300,000 and you owe 10%, you will owe $ 30,000 upfront. And that doesn’t include closing costs, which can range from 2% to 5% of the loan amount, or between $ 6,000 and $ 15,000 more.
Unless you get a low down payment loan that allows you to factor closing costs into the mortgage, buying a home can be prohibitive for first-time homebuyers.
âWhen it comes to millennials looking to buy, student loan debt and high rental rates can cripple their ability to start saving enough for that important down payment and closing cost nest egg,â David said. Hall, CEO of Hall Financial Group in Detroit.
As home prices continue to rise, it’s more likely that you missed the minimum down payment required by the time you’ve saved enough.
On top of that, wages don’t keep up with rising house prices, leading to a year-over-year drop in housing affordability in March, the first drop since January 2019, according to the index. Real Home Prices (RHPI) from First American Financial Corporation. This happens despite the fact that low mortgage rates and higher household income have helped increase a home’s purchasing power – or the amount of home a person can afford – by 11 % for the year in March in March.
âNominal house prices have appreciated at their fastest annual rate since 2005, 14.8%, wiping out any increase in affordability due to rising purchasing power of housing,â said Odeta Kushi, Deputy Chief Economist at First American Financial Corp.
This is where down payment assistance programs (PAA) come in. With over 2,500 AAP programs across the country, they have been essential in helping first-time home buyers cross the barrier between renting and owning a home. However, there are some states with much hotter housing markets that will make it more difficult to qualify for the DPA, which we’ll discuss in more detail below.
6 things to know about down payment assistance programs
Down payment assistance programs can make the difference between owning a home or not. For first-time home buyers or those on a tight budget, this can be a great resource.
Here are a few things you should know first.
- Down payment assistance programs have purchase price limits. Typically, DPA programs can have limits on the purchase price of a home, which can make it extremely difficult to qualify in expensive housing markets. So, it’s important to keep this in mind when shopping for a home or budgeting in today’s high-priced housing market.
- Eligible borrowers cannot exceed income limits. Another constraint is that most DPA programs have income limits. Usually, income limits vary by county based on median income and housing costs. Some programs will look at your income to determine if you qualify for the mortgage. If you are near the income threshold, consider not including bonuses or overtime in your income (unless necessary).
- Depending on the program, you may not have to repay the assistance portion. Many DPA programs offer forgivable loans, which means you don’t have to repay the aid. Surrender terms typically include using the home as a primary residence for a specified period (this can range from three years to over 10 years) and not refinancing the first mortgage.
- You cannot use down payment assistance to close valuation gaps. In competitive housing markets, an appraisal can fall below the purchase price, forcing the buyer to pay the difference. Unfortunately, the DPA cannot be used to fill assessment gaps. But you can use the PAD funds for your down payment or closing costs, freeing up your savings to fill a valuation gap.
- Down payment assistance can be used for closing costs (in most cases). The name âdown payment assistanceâ can be misleading, as many of these programs also allow borrowers to use the funds for closing costs.
- Saving will not interfere with your ability to qualify for down payment assistance. You don’t have to prove that you have no money to be eligible for CCA. Many borrowers choose to use DPA programs instead of dipping into their savings. This can be a great decision, especially for new homeowners who want to use their savings for other housing costs, unscheduled repairs, taxes, and insurance.
Boiling housing markets create new challenges for down payment assistance
While there are plenty of down payment assistance programs out there, many sellers in boiling housing markets don’t even consider buyers who don’t have deep pockets, making DPA programs almost moot. .
In California, for example, where house prices consistently exceed the rest of the country, CCA is virtually non-existent in many areas. Tthere were 359,880 mortgage arrangements in 2019 and 3.9% of these borrowers received down payment assistance in the state.
In some of California’s most densely populated zip codes, like Gardena, where there are nearly 9,000 people per square mile, there were no down payment assistance borrowers in 2019.
In more expensive places in California like Los Angeles County, where more than 10 million people reside, the homeownership rate was 48.7% in 2019 compared to Census Bureau data showing a national rate. 65.1% in the fourth quarter of that year.
âTrying to get an offer accepted with a 5% deposit is next to impossible in Los Angeles. There is no way you can come to the table and need help with a deposit here,â says Julie. Aragon, CEO of Aragon Lending Team. “In this market, where homes far exceed the valuation, sellers choose people with a 20% drop. Just in case the valuation is short, they will have the money. to cover it.
Even in Boise, Idaho, a market that has been bombarded with expensive metro buyers like California, Oregon, and Washington, the struggle is almost the same. Idahoans are ‘chewed up and spat’ in the market by cash buyers who don’t blink to offer 10% or more above asking price, says Jesse Stroup, a mortgage professional at Premier Mortgage Resources in Boise .
Among subways with more than 100 home sales per month, Boise was in second place for price growth from Q4 2019 to Q3 2020, according to a report from CoreLogic, just behind its neighbor to the north: Coeur d’Alene , Idaho. For better or worse, its proximity to the expensive California coastline has made Boise a hotspot in recent years, and that trend shouldn’t be reversed.
âYou have huge amounts of people coming from California to the small town of Boise, so if your agent tells you to go over $ 20,000 above the asking price, you have to do it,â says Stroup. “Boise has never been so aggressive with all this overwork.”
This made it incredibly difficult for people to get a home that could have a great credit rating but only the minimum down payment, and nearly impossible for people in need of PAD.
Entry-level buyers, or those looking for between $ 200,000 and $ 250,000, âswim in shark-infested waters,â because that’s the go-to price for investors, Stroup says. It’s not uncommon for aggressive buyers to include a $ 50,000 escalation clause in their contract, he adds.
Hope for buyers in cheaper zip codes
Not all regions face the same issues as home buyers in places like Los Angeles and Boise. In parts of Texas, the number of home buyers using down payment assistance programs is on the rise, says Joniel LeVecque, director of homeownership programs at the Texas State Affordable Housing Corporation.
âPeople are moving out of their small apartments in large metropolitan areas and looking for more affordable housing in the suburbs, and many of them are using down payment assistance programs,â says LeVecque.
Mark Henderson, loan originator at Gateway Mortgage in Houston, says about 75% of homebuyers he works with rely on DPA programs to get a home.
Although the median house price in Houston is below $ 300,000 ($ 288,200), house prices rose 16% year-on-year from March 2020 to March 2021. Homes marketed there typically receive multiple offers. , which increases the selling price. . Many Henderson customers on a budget buy in the suburbs, where housing is often cheaper and competition less intense.
âThe people who get the DPA would never win those bidding war deals that you see in popular Houston neighborhoods – and most realtors would never put them in such a situation,â Henderson said. “There are houses that people earning less than $ 100,000 can get, but it depends on the county.”
Due to purchase price and income limits, using DPA programs can be difficult, if not impossible, in very hot markets like Austin. But middle-income families may also be eligible.
For example, in the Austin-Round Rock metropolitan areas (which encompasses Bastrop, Caldwell, Hays, Travis, and Williamson counties), the income limit for a family is $ 113,735, which LeVecque says is generous.
Traveling east from Texas to Florida, where home prices are cheaper than their west coast counterparts, 3,449 homebuyers received a total of $ 28.5 million in CCA in 2020. And So far this year, 1,962 buyers have secured a total of $ 18 million in DPA from Florida Housing Finance Corporation (FHFC), one of the largest providers of DPA programs in the state.
And starting this month (June 1), the FHFC will increase the amount of CCA from $ 7,500 to $ 10,000 for all loans from the Federal Housing Administration (FHA), the United States Department of Veterans Affairs (VA) and from USDA-RD.
“FHA loans continue to be the gateway to home ownership for most first-time home buyers, especially those from economically disadvantaged backgrounds,” said Trey Price, executive director of FHFC. âAs housing costs continue to rise across Florida, this additional $ 2,500 will help close the growing gap between the funds available to borrowers otherwise eligible for credit and the help needed to buy their first home. “