It’s always been a challenge to find all of the funding one needs for a down payment in one place. According to research by the National Association of Realtors® (NAR), most people would use up their savings to be able to afford the down payment on their new home. However, today’s buyers are facing increasingly high median home prices and financial hardship due to reduced income or unemployment.
What’s more, this has also affected other common sources of funding like dipping into the retirement fund or receiving gifts from family members. What options does that leave for would-be homeowners?
Down payment assistance programs.
Potential home buyers considering down payment assistance (DPA) programs have to think about employment, homeowner status, income level, and more. This means even more opportunities for misinformation. In Part 1 of this series, we looked at the misconceptions related to income level and homeownership history. In Part 2 we’ll continue to tackle some of the most pervasive myths stumping Americans. Let’s jump back in!
MYTH #4: The COVID-19 pandemic has made down payment assistance impossible to get.
DPA programs are very much still kicking, as program providers switched to offering online and virtual support/education. In fact, the spike in the number of people needing assistance has led some state Housing Finance Agencies to increase the amounts they offer. Furthermore, some DPA programs include unemployment protection to help you pay your mortgage in case you lose your job due to the coronavirus or other reasons. You can check out any program improvements and COVID-related changes by visiting Down Payment Resource.
MYTH #3: I have to pay back any down payment assistance with interest.
There are different types of DPA, with or without interest, and touting varying rates, terms, and conditions. They can be broadly broken down into three main categories.
Second mortgages (a.k.a. interest-bearing loans)
These can come in two forms. There are loans which are paid monthly alongside your main mortgage. There are also deferred loans which only need to be repaid if you refinance your mortgage or sell your home. The first will typically come with low interest rates. The second wouldn’t increase your monthly payment at all. However, keep in mind that it also wouldn’t increase your equity in the home, since you still owe this amount.
These loans are forgiven over a period of time, which can range from 5 to 20 years. There are solid advantages to these loans. Firstly, you only need to repay the loan if you move, refinance, or sell (and even then, you’d only be required to pay the principal). Secondly, this type of loan allows you to build equity in your home without paying anything extra.
This is by far the best type of assistance. Luckily, it’s also slightly more common than the rest! DPA grants are essentially gifts, so you don’t need to repay this funding at all.
MYTH #2: I can’t get assistance because of my student loans and/or credit card debt.
In 2020, student loan debt reached an estimated $1.6 trillion. As a side note, Minnesota falls in the top 10 states with the highest average student loan debt. But despite what most people think, having debt (whether in the form of student loans or credit card balances) doesn’t automatically preclude you from getting assistance.
More important than the amount you owe are your debt-to-income ratio and your credit score. The first can be significantly influenced by increasing your income (with anything from a side hustle to selling items you no longer need) and paying down your debt (through improved budgeting and cutting down on expenses). The latter can be improved by consistently making your debt payments on time and consolidating/refinancing your debt if possible.
MYTH #1: Down payment assistance can only get me so far, and it’s not nearly far enough.
The benefit from DPA programs can mean solid savings for potential home buyers, at an average of $13,000. A survey conducted by the Urban Institute uncovered that eligible borrowers could typically qualify for $2,000 to $39,000. All the more reason to explore your DPA options, if you qualify for a mortgage and the only thing holding you back is the down payment!
Keep in mind that DPA programs are competitive and some are seasonal. They may run out of funds as the fiscal year progresses, so doing your research in advance and inquiring early are key. Plus, know what you need when house hunting and buying a home in the current climate.
DPA programs are not for everyone, but they can bring you closer to your dream of owning a home.
There are the widely available government programs that we’ve discussed. There are also neighborhood revitalization programs which make rehab homes available with assistance, and nonprofits offering DPA in disadvantaged communities as a means of increasing homeownership. For all of the effort involved in finding the right program, the payoff can be incredibly valuable.
Which of these 10 myths surprised you the most? Which one did you always know was false?
You now have the right information to move forward. And even better? You have access to the local experts at Raboin Realty who stay updated on programs and regulations, so you don’t have to. Get in touch with us today.