Three in four U.S. households that don’t own their home say homeownership is part of their American dream. That’s according to the National Association of REALTORS® Profile of Aspiring Home Buyers, published last year. But being able to say “I own it!” means first jumping over several financing hurdles, including having enough income to qualify for a mortgage, having a good credit score, and saving for the down payment.
Your expert advice can make a difference. In addition to coaching prospective buyers on how to get financially prepared, you can help them investigate loan opportunities that include a down payment assistance component.
On top of federal loan programs that offer low or no down payment options, there are more than 2,500 down payment assistance programs operating around the country, according to a 2019 report from the Joint Center for Housing Studies at Harvard University, authored by senior fellow Michael Stegman and others. The most common source of funding is state and local housing finance agencies; in 2017, housing finance agencies alone provided down payment assistance to more than 123,000 borrowers. But other government entities, nonprofits, and mortgage lenders operate their own assistance programs.
Typically, the programs are aimed at low- to moderate-income first-time buyers, but it’s important to learn what’s available in your area, since each program has its own qualifying guidelines, including income and purchase limits, says John Anderson, ABR, CRS, an agent with Twin Oaks Realty in Minneapolis. Assistance generally comes in the form of a low- or no-interest second mortgage that can be paid over a long period or deferred until the home is sold. But some programs offer grants or debt forgiveness for buyers who stay in the home a certain number of years. First-time buyer programs are often open to those who haven’t owned in the past three years, and there are step-up programs in some areas for current owners.
Most programs require prepurchase education or counseling prior to closing, but the education can range in scope and depth. Some programs can be completed with a two-hour online course. Others require a full day of classroom training.
Amber Bennett of Keller Williams Realty in St. Petersburg, Fla., estimates she has closed six or seven sales with down payment assistance since starting in real estate in 2015. Down Payment Resource, a tool integrated into her MLS, helps Bennett quickly identify programs that may be available for a listing. The programs can even be stacked for qualifying buyers.
“It’s kind of like when you apply for scholarships,” says Bennett. “There are a lot organizations that give scholarships based on different criteria that you might not be aware of—and that’s true of homebuyer assistance as well. I recently did a search on a listing, and there were 16 options. Down Payment Resource helps bring all of those possibilities together.”
Bennett was recently reading an article on the CNBC website about a young woman in the Washington, D.C., area who’d received $60,000 in assistance. She cited the story in a social media post with the message “This works in Florida, too.” In the post, she included a personalized link to Down Payment Resource that’s available as part of her MLS’s partnership with the site. A first-time buyer from California saw the post and called her. “I’m going to have a referral on that sale.”
Anderson’s MLS also includes an integration with Down Payment Resource. He closed 70 transactions last year, and says a handful of those included down payment assistance. He’s currently working with buyers who are getting into a $180,000 property with an FHA mortgage and bringing just $500 of their own money. The sellers are helping with 3% toward closing costs.
“People who come to me through the program have often been passed over by other agents and lenders,” Bennett says. “They really appreciate my knowledge and my assistance.”
Eyes Wide Open
While these programs can be an essential source of down payment funding, experienced agents say you should approach them with a full understanding of the process.
“Anytime you’re dealing with government, it’s a bureaucracy, and there’s paperwork,” says Bennett. “I always let the sellers know, ‘Hey, there’s down payment assistance on this, and it’s going to take about 10 days longer than a typical closing.’ ”
More important, she says, is making sure buyers understand they’re bound by the terms of the program—and what that means. “I’ve been through the education [for one down payment assistance program], and it was almost insulting how basic it was. If I have to emphasize one thing to agents, it’s the importance of coaching. I tell buyers who get assistance, ‘Don’t expect to have all this equity in your home within the first few years,” Bennett says.
“I always ask them, ‘How long do you think you’ll be there?’ ” agrees Anderson. “If they aren’t planning to be there seven years or more, they aren’t likely to have much equity, so when they sell and need to pay off the assistance, it’ll be an issue.”
For that very reason, Adriana Olivares of Alegre Home Loans in Chicago discourages the use of down payment assistance. “I’m old school. I’m of the mindset that nothing is free,” says Olivares, who has been in the mortgage business since 1991. “With the FHA, if you can get the sellers to pay closing costs, at the end of the day, you won’t need to bring that much to the table to close a loan. Why tie yourself down?”
Furthermore, government assistance programs can run out of funding within a fiscal year, she says, leaving buyers without the expected resource. “You could work the whole file,” Olivares says, ”and then find out the program has run out of money.”
Conundrum for Minority Buyers
Despite the drawbacks, a lot of buyers, especially minority households, depend on down payment assistance to get into a home of their own. Stegman’s report shows that African American buyers are significantly more likely than their white counterparts to receive assistance in the form of a second mortgage or government grant.
Richard Ferguson is president of CBC Mortgage Agency, a nationwide lender, based in South Jordan, Utah, that specializes in down payment assistance in the form of a low-interest second mortgage that must be repaid over time. “We see down payment assistance as highly critical to helping minorities, particularly millennial minorities, who often don’t have access to down payment assistance from a parent or other family member,” he says.
Currently, about 65.1% of households own their home, according to data released by the U.S. Census Bureau in January 2020, but when you look at ownership based on race and ethnic origin, you see a troubling picture:
- 73.7% of non-Hispanic white households
- 57.6% of Asian, Native Hawaiian, and Pacific Islanders
- 48.1% of Hispanic households of any race
- 44.0% of black households
Both government and the real estate industry are keen to end those disparities.
The National Association of Real Estate Brokers, the country’s oldest minority real estate association, declared in 2018: “Building wealth through homeownership continues to be and will remain a long-term goal, which will be reached only when the rate of Black American homeownership is on par with the White American homeownership rate.” NAREB launched a campaign in 2019, “House Then The Car,” urging black millennials to make homeownership a priority.
Collaborating with NAREB and other organizations to broaden housing opportunities is one of the National Association of REALTORS®’ strategic priorities in 2020. NAR supports down payment assistance as one approach to advancing that priority—to a point.
During the housing price runup that preceded the Great Recession, down payment assistance got a black eye after a number of nonprofits sprang up to facilitate seller-paid assistance. These programs had the unfortunate side effect of artificially inflating house prices, says Megan Booth, director of federal housing, valuation, and commercial real estate policies and programs for the National Association of REALTORS®.
The U.S. Department of Housing & Urban Development banned seller-paid assistance programs on FHA mortgages in 2008 and has continued to scrutinize these programs, citing data showing that assistance from government entities results in higher default rates. In April 2019, HUD issued a mortgagee letter that restricted government entities from offering assistance outside their jurisdiction but later rescinded the letter when it was challenged in court by CBC Mortgage, which is owned by the Cedar Band of Paiutes American Indian tribe.
NAR’s Booth says HUD is expected to publish a new rule soon on down payment assistance programs. “We haven’t really taken a position on jurisdictional issues,” she says, “but we strongly support down payment assistance that does not artificially inflate the price.”
Artificial inflation of prices combined with lax lending standards were factors that led to the housing bubble and subsequent collapse in 2007. Industry economists say conditions are quite different in 2020; still, salespeople should be alert to signs of weakening in the market and how it might affect buyers using down payment assistance.
The median existing-home price in October 2019 was $270,900, up 6.2% from October 2018, marking 92 straight months of year-over-year gains. Speaking at the Real Estate Forecast Summit hosted by NAR in December, AEI Housing Center Director Edward Pinto said, “We’re in the eighth or ninth inning of a boom that began in 2012. One of the problems that happens with buyers of color during booms: They tend to come in last and leave early because of foreclosure.”
A risk worth taking?
It’s a valid issue, says CBC’s Ferguson, but one that shouldn’t derail the down payment assistance industry. “The most important thing you can do is make sure there’s a strong educational component,” he says. “Our program not only has prepurchase counseling—not online but in person—but also for the first 12 months after the closing, we call [the borrowers] every month to help diagnose exactly where they’re at—advising them on issues ranging from where to send payments to how to maintain a budget.”
To learn more about down payment assistance programs in your area, you can search your state government website or go directly to the Down Payment Resource website. But the best approach, Anderson says, is to build relationships with lenders in your area who know the down payment assistance industry and have a track record of success with it. “Not every lender wants to do it, and that’s OK. Even though I’ve been doing this for a lot of years, I make it a point to stay in touch with lenders and ask them, ‘What do you have in the way of down payment assistance?’ ”
“Over 95 percent of our borrowers will be successful,” Ferguson says. “There will be 5% who will fail. That might rise to 8% in a downturn, which would be a staggering problem. But we need to ask ourselves as a society, is it worth it to prevent having a permanent underclass of renters?”