The Truth About Down Payment Assistance
Some surveys report that up to two-thirds of first-time homeowner hopefuls indicate the funds needed for a down payment is their biggest obstacle to ownership. There are several programs available that offer reduced down payments as low as 3%. The current median sales price in the Indy market is $195,000, bringing a 3% down payment for an average home to $5,850. Add in another estimated 2% for closing costs, and you're up to $9,750 out of pocket. Based on the median household income in Marion County, that's about 2.5 months of income you would need to purchase your first home. The way around this is down payment assistance.
So, what is down payment assistance? Down payment assistance, or DPA for short, are programs that help home buyers with loans or grants to reduce the amount you need to save for a down payment. There are several programs available, which I will cover in depth in another post. For now, I want to make you aware of the stipulations that come along with utilizing a DPA resource:
1. You have to qualify for the assistance. When you go to purchase a home, you have to first qualify for the mortgage based on a set of credit, income, and property factors called underwriting guidelines. Each mortgage program is different. The same goes for down payment assistance. In order to provide the DPA funding, the granting organization will have their own set of criteria they require, on top the the mortgage criteria. In the real estate industry, we call the additional guidelines overlays. Typical overlays will be minimum credit scores and maximum household income limits.
2. The interest rate will likely be higher. While most down payment assistance programs do not require the amount to be paid back (keep reading), there will likely be an interest rate premium. This is because a lack of savings demonstrates a higher risk profile.. From my experience, the interest rate tends to be 1-1.5 points higher than what you would pay if you provided your own funds for a down payment. At a price point of $195,000, that could mean up to an additional $170 on your monthly payment.
3. There could be a payback period. DPA programs are reserved for home buyers that intend to occupy the home they're buying as their primary residence. So, there is typically a clause written into the program that states you must live in the home for a minimum of 2-9 years, or the assistance becomes repayable.
The purpose of these points are for you to understand the concept of down payment assistance and weigh your options. Should you continue to save or should you take the down payment assistance? That's ultimately a decision you'll have to make. Based on your current budget, how long would it take you to save a 3-5% down payment, plus closing costs? Could you be missing out on building profitable equity in that time period? Is your current savings account paying more interest than the equity you could earn? Will affordability be the same next year? Could you refinance and reduce your interest rate later? Are you okay with locking into a home for a designated time period? All questions to ponder when considering using down payment assistance options.