Is a Down Payment Assistance loan right for you?

October 15, 2019


Not having enough cash to make a down payment on a home is a common concern. But it doesn’t have to be the end of the road! I recently spoke with Mark Sherman of Atlantic Trust Mortgage, who provided valuable insights on another option: a DPA (Down Payment Assistance) loan.


Mark said in addition to understanding the ins and outs of traditional loan products (e.g. Conventional, Jumbo, USDA, VA, FHA), mortgage brokers are also responsible for being well-versed in a variety of niche and first-time homebuyer products. This includes knowing how and when these alternative products are valuable to buyers.


Key among these products is the DPA loan. Though there are 3% down, 3.5% down and even 100% conventional, government and USDA financing options, some buyers still can’t cover the down payment and closing costs. However, they might have good credit and the necessary income to qualify for the monthly payment.


For these buyers, Mark says the DPA portion of their financing is provided as a “second” mortgage “grant” that requires no payment (or a reduced interest-only monthly payment). Then they can apply the funds from their “grant” to their down payment and closing costs. In many cases, the buyer needs no cash at closing.


Provided through state or county initiatives, DPA loans are designed for low- and moderate-income buyers. In Florida, the most popular source of these grants is the Florida Housing Finance Corporation. Depending on their availability, down payment assistance grants are either forgiven by 20% per year or repaid when the home is sold or refinanced.


With some grants, after five years in the home, you don’t have to repay any of the original grant. DPA loans can often be used with conventional, FHA or VA loans.


There are also national DPA loan programs that have various requirements. At minimum, you will need a credit score of 640 to 660, cannot have owned a home in the last three years, must be at or below the “income limits” designated by the grantor, and must qualify per the guidelines of the loan agency you are pairing the grant with (FHA, VA, Fannie Mae, etc.)


While there are advantages to DPA loans (very little cash out of pocket, reduced or no monthly mortgage insurance payments, no intangible taxes or doc stamps), there can be several down sides, like:

— Rates are often a lot higher than standard conventional or government loans

— There are origination fees (points) and additional closing costs

— They typically take an additional two to four weeks to approve

— Excludes borrowers with lower credit scores


Mark said if a borrower can manage to save 3% to 3.5% and has a credit score above 620, there may be better options for the buyer (especially if seller concessions can be negotiated). In addition, if you live in a rural area and qualify, a 100% USDA loan may be a better option.


All things considered, if there are no other options, a DPA loan can be a good way to help buyers get into their first home. Thank you to Mark Sherman at Atlantic Trust Mortgage for your helpful advice!

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