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.
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.
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?
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.
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.
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!