AL and FL Mortgage News

Down Payment Assistance - 9 Steps to Consider Before Considering

December 9th, 2021 2:07 PM by Devin Murray

In previous posts we have discussed low and no down payment loan programs like VA and USDA but we have not discussed what assistance is available to help first time buyers with down payment and in some cases closing costs who are getting FHA or Conventional loans.  Our industry calls this form of assistance Down Payment Assistance or DPAs.  

Rather try to forge experts out of everyone, below is a set of steps you can take before getting a second education.  There is a great deal of variability and these are complicated but the proposed is based on real inquiries from multiple states, closed loans, and individuals and families who succeeded in becoming owners using DPAs.

Step 1: Preapproval First - The overwhelming majority of DPAs are classified as grants or loans that is closed behind/in conjunction with a Conventional, FHA, USDA, or VA first mortgage.  For that reason, it is best to get preapproved for one of these programs first to determine your options and capability since it is the first and majority of the funding you will need.  The key is get your income and credit qualified with the upfront understanding with the loan originator that the asset portion is not ready.  

  • If you don’t qualify now for the first mortgage now because of credit, a loan originator should help explain a path or plan to get you qualified down the road.  Don’t give up, be strong, persistence wins.
  • If you do qualify ask the originator and carefully note the following information: 
    1. your 3 credit scores are _______, _______, _______,
    2. the maximum estimated home price you qualify for: $__________________________
    3. down payment amount required at the max price and what percentage that equals:  $_______________ or ______________% of price
    4. estimated closing costs and prepaid items at that maximum price: $_______________

Step 2:  Define Your Total Asset Needs – With the preapproval as your main parameter the focus is on getting enough assets 1) for the down payment will be AND 2) closing costs and prepaids. This line is combined as cash to close on disclosures but know most DPAs, as their name indicates, allow funds to go towards down payment first and closing costs/prepaids second.  Some grants sole purpose is closing costs and prepaids.  Sellers and lenders can contribute to closing costs and prepaids but the primary focus is down payment.

You might have to go back and revisit some calculations with your LO and ask about acceptable sources of funds for closing.  Gift funds are one example.  In some states there are forms of assistance you can get BEFORE you buy where your federal tax liability is reduced and you can save prior to buying.  There are too many exceptions and examples to list here.

Step 3:  Geographic Flexibility – One of the most ignored topics for all buyers is having a firm understanding of your geographic preferences and flexibility.   What areas are you willing to buy in?   Going from big to small is there another county, city, or neighborhood?  Use the internet and bookmark specific example listings in your price range in those other cities and counties.   These are simply examples at this point.  This can take up an hour or two rather than going to hunt for properties with a realtor or driving around.

  • The main idea in knowing how flexible you are or are not is that DPAs eligibility can be restricted by county, city, and in many cases if a property lies within a census tract or not.
  • Most blogs and websites direct you to get in touch with “an approved lender” who deals with DPA.   What we disagree with is that those lists are highly outdated.  Hang on for just a bit though, this will save you time.

Step 4: DPA amounts – DPA can be combined with other forms assistance, gifts, seller contributions, etc but let’s assume you use only one kind and it is just for the down payment.  To that end know that in 2021 the average cap on a DPA funds per family in Alabama was $7,500 and in Florida the average is $10,000 with a few as high as $15,000.  Exceptions exist yes but it would be smart to compare these assistance caps and see if these are enough to cover it?  This is not a reason stop if a gap exists. 

Step 5: Credit requirements – While not exclusive, across 134 counties in AL and FL a 640 credit score is a very common requirement for DPAs.  In some instances, a 680 may be required if a conventional loan is being used.  By comparison you can qualify for an FHA loan with a 600 score, conventional 620.  If you are below 640 across the board it might be necessary to find out how you can get to that mark with your mortgage originator. improving your score does not always take a great deal of time and money as we mentioned previously.

Step 6: Income limits – Yes by definition DPA programs are designed to help “low to moderate income” first time buyers.  The numbers varies significantly but what does “low to moderate” even mean?

  • A major truth nugget is that DPAs coupled with FHA loans tend to be far more liberal when defining “moderate” as a significantly higher number income than Conventional DPAs.
  • For example: Statewide in Alabama the Step Up program, which is very popular, sets a statewide  FHA income limit is $130,600 and also has no geographic restrictions.  However, the Step Up for Conventional loans in a majority of census tracts in the major metro areas at the time of posting is $66,320 in Huntsville, in $60,080 Birmingham, and $59,440 in Orange Beach (using Freddie’s 80% AMI).  Note for conventional this decreases further as you travel to less populated areas.  So for FHA Step Up moderate is much more inclusive with respect to income.

These numbers fluctuate up and down.  Family size does increase income limits for certain DPA programs just as it does for USDA but not always.  Also if you think Florida would be more forgiving in this interpretation compared to Alabama think again. A one person household AMI in Miami-Dade County is lower than some figures I mentioned below in Alabama.

Step 7: Price Caps – Keeping in mind that the FHA loan limit in our lending area for a single family residence is $356,262 for 2022 and the conventional limit is $647,200.  This matters because in addition to income limits, purchase price caps exist that are below these limits depending on the property location.  While we won’t dive into target and non-target areas as one example in Alabama closing recently a property in a non-target area was capped on FHA approximately $301,000 which is about $56,000 beneath the limit.

  • Because of income restrictions on conventional DPA programs, maximum purchase price is likely going to be the limited by the income cap rather than the new $647,200.  While conventional limits tend to grow each year, Annual Median Income can and has fluctuated down as well as up.

Step 8: Time – It is no secret that many first time buyers without a large down payment were heavily marginalized earlier this year.  Many sources have cited they were outcompeted due to higher offers and people bringing 20%+ down which might be the prevailing reason.  When that slows down as it already has, inherently time related to being approved for a some DPAs is a real problem.

  • On a closing roughly two weeks ago, a SHIP program in Florida stated that processing for the program was taking 6 weeks after first loan approval and no exceptions would be given to that time frame.  Now we were able to actually help our borrower compete in a multiple offer situation but know it was a challenge because the standard norm in most places is 30 days.   
  • This is not a reason to not use a DPA just know an originator and areal estate agent’s skills can not be understated so choose wisely.  

Step 9: Which DPA for you?   Understanding the parameters, we recommend discussing these steps and DPAs with a skilled originator and deciding what path is best for you.  Know that brokers have access to many lender’s products and most often are excluded from “approved lenders” listed.   So we recommend you talk to a reputable mortgage broker in your state.

if you are in Florida or Alabama, tell us about your scenario or give us a call at 888-269-8335   We’d love to help answer your questions to help you plan and become a homeowner soon!!!! 

You can do it!

 

 







Posted by Devin Murray on December 9th, 2021 2:07 PM

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