The ugly truth about buyer down payment assistance programs

Rates & lender fees are typically higher on a first mortgage when using a down payment assistance (DPA) program. Some DPA programs require the first mortgage to come from that program, while stand alone second mortgage DPA programs increase the first mortgage rate and lender fees. Why?

With rare exceptions, DPA programs are typically designed for the riskier (to lenders) home buyer who is short the needed down-payment and closing cost funds. A general rule of home lending is the less funds of their own a buyer has into purchasing a home, the greater chance of them defaulting (falling behind on monthly payments). Reasons for default are numerous, with the most common due to extreme property condition issues requiring costly repairs to a buyer's future financial struggles. With little of their own money into a home, the easier it is for a homeowner to walk away. And less equity due to no down payment also makes it harder to resell a home quickly, if the need arises, in the first years of home ownership.

How all this comes together to increase loan pricing on DPA programs?? --- Lender rates and fees are based on risk--higher risk means higher rates and fees.

As an example, comparing the California DPA program, Golden State Financing Authority (GSFA), I recently ran numbers for a potential home buyer looking into that program on an FHA loan, and matched it up against a regular FHA loan without this DPA program. Here are the results:

The no dpa regular FHA loan rate was about a quarter percent less (at a minimum) than the GSFA DPA program and roughly $10k less in lender fees.  The higher rate on the FHA loan provided with GSFA, and the monthly payment on the second mortgage used to secure the dpa funds adds about $150 more per month to housing costs.  The typical DPA funds provided are 3.5% of the loan amount, and in this particular case would be about $13,510.  However when you factor in that extra $10k in lender fees on the GSFA program, the result is your funds to close are only reduced by about $3500.  Rates for the GSFA program can be found here -- https://nhfresportal.nhfloan.org/pub/GSFA_Plat.aspx 

Hard to comprehend how all their numbers apply, but the main thing to know is the more the DPA funds provided, the higher the loan rate on the FHA loan.

A buyer may be eligible for some different program options with the GSFA that includes a small portion of the DPA considered a gift and no payments on the second mortgage securing the DPA funds, but it appears some of these options are income restricted and a typical household income needed to qualify for a sales price in California may be too high.  This is something you would need to explore with a lender handling this program.

And finally, the DPA funds, whether requiring a monthly payment or not, are typically secured against the home you buy.  Which means they will most likely need to be paid back on a future sale or refinance.

FHA has an easy to do streamline refi program, great for when rates drop, with no appraisal and no re-qualifying.  A home buyer would be eligible for this streamline refi program after making 6 to 7 monthly payments on time, assuming rates drop enough to make it worthwhile.  However a FHA streamline refi option is typically not available while there's a balance owing on the GSFA DPA second mortgage. Per current rules I reviewed, the GSFA program will not subordinate to a new first mortgage refinance, requiring a complete payoff from a homeowner's own funds or an alternate, fully qualifying refinance at a higher loan price. Subordinate means to allow a new first mortgage refinance to stay in front of the dpa second mortgage in the chain of title (refi loans must be in first position).

A lot of technical info included here that can be confusing to many.  Please feel free to reach out at anytime with questions.  And always remember, loan programs, rates available and lender fees are based on today's rates --and are subject to change with market conditions, and -most importantly -- are not set in place until a property is chosen, under contract and a rate/lender fee combo is locked with your lender of choice.