Down Payment Assistance (DPA) programs: What You Need to Know

There are many DPAs on the market, and while some are much better than others, none of them start homeowners off on the right foot. Before you dive into the DPA pool, here are some important things to know.

The results of a 2021 study published in The Journal of Fixed Income, “The Lowdown on Low-Down-Payment Mortgages: Is It Safe,” found that lower initial down payment mortgages are more likely to be delinquent by 90 days or more than mortgages with 20% down payments. The question is, are these programs setting you up for success, or simply putting commissions in industry pockets?

If a DPA is your only way into homeownership, then I’m all for it — as long as you, the homebuyer, are provided full transparency of what you’re stepping into. Not every program is the same, so be sure to read the fine print on any that you are considering.

Here are some of the fine print items I’ve found that homebuyers weren’t aware of:

  • Locked into higher than current interest rates for a minimum of three years
    • Some programs lock you in at a rate even higher than the current market rate you would otherwise qualify for and add the caveat that if you sell the home or refinance in less than three years, you own those “forgivable” monies back to them. Since you are entering homeownership with NO equity, this likely will mean that you cannot sell the home for as much as you owe – leaving foreclosure as your only option should you find yourself in financial hardship.
  • No Late Payments – Ever
    • If you are ever late on your payment, you must repay the “forgivable” money. It gets tacked on as a 2nd mortgage, eating into any equity you may otherwise be earning. If you find yourself needing to sell the home …same outcome as above. If you cannot sell the home for enough to pay off the mortgage and this 2nd lien, then you cannot sell the home! You may be left with foreclosure as the only option; destroying your credit, reducing your ability to find a rental home, and impeding your ability to buy another home for several years.

The DPA getting the most press right now is being called a “0% down program” by many. This is description being shared by many who should know better is misleading, at best, and a clear violation of Reg Z. It is NOT “0% down”, it is a 2nd lien of up to $15,000 attached to your home. 0% interest, but still an additional debt against any equity you would otherwise be building. What does this mean for the long-term?

  • You are committed to a higher interest rate for longer.
  • You are entering homeownership with no equity.
  • The lack of home equity will prevent you from refinancing for many years, unable to take advantage of lower rates when they do eventually come down.
  • The lack of equity will necessitate you paying mortgage insurance for many years, locking you into a much higher monthly housing expense; money that could otherwise be going toward other living expenses, or toward building your home equity.

What is the motivation for this program? To increase current loan volume, of course, but this lender also knows that this program will prevent borrowers from participating in the future refinance boom that cuts into their profits. With the borrower locked into the initial loan for a longer period, they will accumulate more profit from this initial loan. It will take the borrowers who utilize this program several years to come out ahead, assuming they have the means to remain in the home and keep up on maintenance items – a valid question for buyers coming to the table with no savings.

What is the upside of DPAs?

There is an upside. I have done a handful of loans with these programs when it made sense for the borrower. There programs are good when:

  • They have been fully educated by their mortgage lender on what they are committing to long-term so they can proactively avoid pitfalls, such as refinancing too soon.
  • They plan to stay long-term in the home. This is NOT a way to have short-term homeownership in the hopes of making a profit. These programs are for families planning to put down roots.
  • They have SOME liquid reserves to keep up on annual home maintenance items and in case of financial hardship (job loss, death of a family member, etc).
  • They understand that when something breaks, there is no landlord to call, and they are prepared to deal with the unexpected without the benefit of home equity to tap into.

These programs almost always are built for first time buyers and / or those who make well below a given area’s median income. These are the borrowers with the least financial education or experience, and they are relying on industry professionals to meet their fiduciary duty to put borrower’s best interests ahead of their own. How do you know if you have a mortgage lender doing their fiduciary duty? By educating yourself on topics such as this, then making sure these conversations are initiated on their end. Red flag for those that are not bringing this information to the forefront of discussions.

Tammy Metzger

Residential Mortgage Loan Originator. Dog Mom. Knowledge Seeker. Voracious Reader. Solo. Outdoors enthusiast. Genre Film Lover.

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