From a loan originator’s point of view, Down Payment Assistance Programs, or DPAs, have long been considered a last resort for many reasons. Traditionally, DPAs were seen as problematic because they were known to slow down and complicate the loan process and were tied to higher interest rates. Therefore, it’s important to understand the pros and cons of any assistance program before you think you’re getting something for nothing in exchange for a little extra effort. If not analyzed carefully, these restrictive programs can cause people to unwittingly pay far more in the long run with a DPA than they would if they had gone the traditional route without assistance. In some instances, a small down payment can save a lot in the end.

One issue with DPAs has been that buyers are restricted from refinancing to a lower interest rate for a period ranging from 10 years to never. Refinancing would trigger having to repay the assistance in full. Other restrictions included requiring that the buyer remain in the home for the entirety of the loan, so in essence, the homeowner could NOT MOVE until the loan was paid off – often 30 years! Also, in exchange for assistance, local housing programs placed additional restrictions on multi-unit buildings requiring the non-owner occupied units to be rented under market value to provide low-cost housing to the community, thus causing the owner to lose out on significant amounts of rental income over the course of the loan.

So it’s understandable that when looking at the tradeoffs, responsible loan originators would do everything they could to offer alternatives to DPAs. Ultimately, the negative long-term effects might not be worth the short-term financial support. Still, sometimes it was unavoidable, and the buyer had to either accept the restrictive down payment assistance terms or not buy at all.

Barriers to Qualification

In addition to the strings attached for those who did qualify for down payment assistance, there was another group of people who wanted the benefit of the programs but were unable to qualify. Some homebuyers would like to use a DPA to allow them to hold on to modest savings. Rather than spending every penny on a down payment and closing costs, keeping their nest egg could help change out the carpet after purchasing the home or fund an emergency savings account for the kids. Especially in a tough financial climate, it’s not easy for families and modest income earners to save money. Spending it all to purchase a home stripped them of a buffer. However, many DPA programs disqualified anyone who technically had the funds to qualify on a low-down payment program. With wages outstripping savings, another big barrier to getting DPAs has been earning too much income to qualify despite not being able to save money for a down payment – a true catch 22.

But There’s Hope! –  Enter the Next Generation of DPAs

The good news is that lending products are always evolving to meet the needs of qualified buyers, and it seems at least some lenders see this niche as worth serving. These lenders offer a new breed of Down Payment Assistance that offers real solutions to qualified buyers with less restrictions than previous versions. One such option is forgivable assistance after 60 months of on-time payments (five years is a lot more reasonable than 30!). Such assistance can be up to 6% of the purchase price to be used for the down payment and closing costs. In other words, the assistance does NOT have to be paid back provided consistent on-time payments are made. Other DPA options are repayable with easy terms for people who just want to hold on to a nest egg or have the money to use after closing. Now borrowers can get help even if technically they have the cash to close without it and with no income restrictions! All of this makes DPAs a useful option for many people, not just a last-resort option for the select few that meet all the strict qualification requirements.

As with any loan program, multiple factors and scenarios have an impact on which option is best. Only a professional home loan expert can give a full picture with comparisons, offer the best options, and help choose the most advantageous loan structure for each given situation. Reach out today for a free consultation.