Housing Finance 2020

Ten Ways to Cover Your Down Payment

TRYING TO SAVE MONEY to buy a home is a challenge for people everywhere. Depending on the size of your household, and your paycheck, you can only stash away so much money on a consistent basis. It seems like every time you get a pay raise, there’s another bill that just got higher. Sometimes that bill is from your current landlord. And you just can’t wait to say goodbye to your landlord.

Lacking sufficient funds is also a dilemma for families who have outgrown their starter home and who need more cash to purchase a larger house, or one with more land. Those who are relocating to a new job might find homes much more expensive in the new area. Not only are these consumers faced with an affordability problem, but they will also have a mobility problem if they are unable to sell their current home quickly.

Prospective homebuyers have an array of Internet-based tools to explore homes for sale and monitor mortgage interest rates. Many consumers have learned how to navigate online pre-qualification tools and often discover that they can afford their anticipated mortgage payment.

What’s holding them back from owning their own home is essentially one thing—cash. The critical question people ask is simply, “How much money do I really need?”

$200,000 Home Purchase Scenario

On average, homebuyers need at least $15,000 to buy a home at a sale price of $200,000. This estimate is based on a down payment of $10,000, representing 5% of the sale price, plus another $5,000 to cover closing costs and other expenses. For people who are able to save $100 per week, it will take about three years to reach a savings goal of $15,000. For many households, setting aside $100 per week is an impossibility, thus further delaying the prospects of homeownership.

According to Zillow Research,1 the average rate of appreciation for residential properties on a nationwide basis in 2018 was 7.6%. Each year that future homebuyers spend trying to save for their down payment, home prices continue to rise. This chapter introduces ten unique ways to supplement your savings, and in many cases, cover the entire down payment.

The infographic, Types of Down Payment Assistance, distinguishes five types of programs generally associated with state housing finance agencies and community-based housing partnership organizations. Housing finance agencies are independent state-chartered entities established to meet the affordable housing needs of the residents of their states.

Working under the direction of state government, housing finance agencies fund and administer lower-interest rate loans that are originated by local banks, thrifts, credit unions, and mortgage companies. Each state housing agency creates mortgage programs that parallel state population characteristics, housing costs, and median household income. Criteria is generally established on a per-county basis; however, there are many variables, particularly within major cities.

As a general rule, borrowers must meet certain eligibility rules regarding maximum income and maximum purchase price (or loan amount). Rules are established on a per-program basis, such as first-time homebuyer mortgages, renovation loans, down payment assistance and so forth. Most agencies offer several loan programs and repayment options, including some with no income restrictions.

The State Resource Directory included in Part 2 of this book contains a listing of each housing finance agency in every U.S. state. The agency’s featured mortgage programs, including down payment assistance, are summarized along with a Representative Preview of eligibility rules. Many state housing finance agencies collaborate with local partnership organizations. Each agency works in tandem to enable seamless approval for the homebuyer’s first mortgage and down payment assistance.

There is a section within each state directory titled Down Payment/ Homebuyer Assistance. This section lists entities located throughout the state that offer homeownership assistance. Listings are sorted alphabetically and include municipal offices, local housing partnerships, neighborhood development organizations and Native American family service centers. Municipal offices are listed by location, such as city, county or parish.

The directory in this book lists organizations that offer some type of financial assistance. However, there are many more sources that you can find on your own. The instructional guide on the next page explains how you can locate sources of grants or down payment assistance in your geographic area.

You may discover many support services are available to help existing homeowners with heating, energy improvement, foreclosure assistance, and programs for veteran, senior or handicapped households. Perhaps these organizations are not providing financial assistance to new homebuyers; however, you will learn about many valuable resources that will be available to you after you own your home.

Note: your mortgage lender is required to confirm that down payment assistance from non-governmental entities are authorized to disburse funds for your requested loan program. Non-governmental entities include private, nonprofit, and charitable organizations. Federal, state, and local municipal agencies are considered governmental entities.

Types of Down Payment Sources

Housing Agency Sources

#1 — Grants

Grants are very much like gifts since they are free and usually without conditions. Amounts are modest, typically ranging from $2,500 to $4,000. For the most part, grants are only available to first-time homebuyers purchasing owner-occupied properties and may have maximum income restrictions. Veterans and active servicemembers are usually exempt from the first-time homebuyer requirement.

Grants usually have no conditions other than owner-occupancy. Rarely, a grantor may stipulate that, if the home is sold within a short period of time, the homeowner may be asked to return a proportionate amount of money received. With grants, there are no liens placed on the property.

In addition to first-time homebuyer grants, there are many state housing financing agencies as well as local partnership organizations that offer grants to current homeowners for property improvement. Most often, improvements must be for a special purpose such as lead paint removal, energy improvements, heating system upgrades or to construct accessory features for senior or handicapped household members. These special-purpose grants may be found in the $4,000 to $8,000 range, depending upon the type of home improvement project. There are a few U.S. states offering grants as high as $15,000 to qualified homeowners.

New homebuyers may be eligible to obtain a special-purpose grant to cover the cost of certain repairs or to build a handicap access. Energy-improvement grants are gaining in popularity and are often available to both first-time homebuyers and current homeowners. If an energy grant application is accepted for work to be completed after the closing, it is a good idea to let the mortgage lender know about any potential savings in utility costs. Your lender may consider the expense reduction as a “compensating factor,” a term used by mortgage underwriters to help support loan approval.

Donations from entities such as churches, municipalities, nonprofit organizations, and public housing partnership agencies are acceptable by residential mortgage lenders and secondary market investors such as Fannie Mae and Freddie Mac. Standard rules usually allow grants to cover all or part of the down payment. Grant...