Down Payment Assistance Pros and Cons – whether you should buy now or save a down payment.
I share the pros, cons, the good, the bad, the pluses, the minuses.
PRO #1: Money for down payment…of course
Normally you need 5% for Conventional, 3.5% down for FHA or 3% if you utilize a special Conventional loan plus the closing costs you need.
Down payment assistance covers the gap between the down payment plus closing costs and the cash you have.
CON #1: Income Limits
99% of the down payment assistance programs have some income limit. Normally between 80% and 120% of the area median income (AMI).
PRO #2: You may not have to pay it back
There are grants and forgivable seconds. Grants never have to be repaid while forgivable seconds gradually get forgiven over time.
MetroDPA is a good example of a forgivable second where the second mortgage is forgiven at a rate of 1/36 every month which means after 36 months you no longer owe anything on the second but if you sell at 18 months you owe just 50% of the second mortgage amount.
CON #2: High Costs (maybe)
If the down payment assistance program is part of a package that includes both a 1st mortgage and second or grant then the first can sometimes carry higher rates, fees or both. And, of course, if the second mortgage you get for down payment assistance has an interest rate greater than 0% there will be costs over time there, too.
PRO #3: You can buy sooner!
Using a down payment assistance program you drastically reduce (or eliminate) the time you need to save for down payment.
With rates at historic lows and home prices going up housing affordability is likely better now than it will be in 6 months, 1 year, 5 years or 10 years down the road.
Did you know the homeowners have a net worth 36X greater than renters…largely due to the equity in their homes.
CON #3: Some require you to be a first time home buyer
If you are a first time buyer, then no worries. If not, but you have not owned a home for the most recent 3 years then these programs will consider you a first time home buyer anyway. And some programs have lifted any first time home buyer requirement so you may be just fine.
PRO #4: Combine programs to better your loan terms
If you can increase your down payment from 3% to 5% using down payment assistance you may be able to reduce your rate or lower mortgage insurance costs.
FHA combined with a second or grant program offered through a city, county or statewide program may allow you to get a better rate on your first mortgage.
CON #4: Geographical Restrictions
City programs, county programs are all limited by certain areas. In addition if a city has a down payment assistance program you normally can not use a county program. And if a county program exists you typically can’t use the statewide program, such as Colorado Housing Assistance Corporation (CHAC). One big exception is CHFA which does not care whether there is a city or county program in the area you are purchasing.
PRO #5: Lower MI
Similar to a previous pro about lowering costs, you may be able to get a loan with lower MI using down payment assistance. Putting more money down on a conventional loan may result in lower monthly MI. In addition, CHFA Preferred Plus is a 3% down conventional loan with lower cost MI and down payment assistance.
CON #5: Longer to close or more documentation requirements
Due to the additional restrictions such as income limits, asset limitations and first time home buyer requirements there may be some additional documents you will need to provide to the lender which can take more time. In addition there may be additional compliance review to ensure you meet these additional requirements. Normally this is no more than a week…if that!
In general, the PROS outweigh the CONS when it comes to down payment assistance, especially when you factor in rising home prices, historically low rates. And you can always do a refi, assuming it makes sense. You will have to run the calculations to ensure that the lower rate and/or MI will outweigh the costs of a refi and we can help you do that with a free refinance analysis.
Helpful Links & Related Videos:
Down Payment Assistance Programs in Colorado
Top 3 CHFA Programs
CHFA Preferred Conventional 3% Down with Down Payment Assistance
FHA vs Conventional: https://www.youtube.com/watch?v=5BIIaQlOsis
What are Closing Costs and How Much are They
What is Mortgage Insurance: https://www.youtube.com/watch?v=VaDReOwl6Nc
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