The desire to own a home is a time-tested American instinct. Homeownership not only helps families build wealth and financial security, but also creates a sense of stability and control that enhances quality of life.
Given such benefits, why don’t more people ditch the landlord and buy a home?
Affordability is one barrier, and the tough credit environment certainly plays a role. Following the foreclosure crisis, many lenders tightened access to safe and affordable mortgages, restricting people with moderate credit scores from buying homes.
But experts suggest another obstacle – or perceived obstacle – may be even more powerful: the down payment.
A recent study by the Urban Institute found that 53% of renters cited saving for a down payment as a key hurdle to homeownership. Along with that finding, the report showed that the vast majority of consumers – 80% – were either unaware of down payment requirements set by lenders or misinformed.
Specifically, only 19% of consumers believed lenders would make loans with a down payment of five percent or less. And nearly one in three people surveyed said they believed lenders expected borrowers to put down 20%.
Exacerbating such confusion is another reality keeping would-be buyers on the sidelines: most people are unaware of down payment assistance programs. Even those who have heard of down payment assistance have misperceptions about it, assuming that help is available only for targeted census tracts, distressed neighborhoods or very low-income households.
That’s unfortunate, because 87% of properties across the country are in an area eligible for one or more homeownership programs. By taking advantage of such programs, many renters could obtain a mortgage and begin reaping homeownership’s powerful economic benefits, including tax advantages and the ability to accumulate savings for a child’s college education, a medical emergency or a secure retirement.
The Urban Institute study reported that there are more than 2,144 active down payment assistance programs in operation, and 1,295 agencies and housing finance agencies offering them at the local, state and national levels. Some states have multiple programs and providers. California is the granddaddy of them all, with 262 active programs offered by 243 state or housing finance agencies.
Eligibility for down payment assistance is based on multiple criteria, including loan amount, homebuyer status, borrower income, and family size. Help is available for a variety of loan types, and programs may target a geographic area as large as the nation or as small as a city — with some even focusing on individual neighborhoods. While many serve first-time homebuyers, military personnel, veterans, or other specific populations, others are open to any homebuyer who meets income and purchase price limits.
The Federal Housing Administration (FHA) has been helping homebuyers of modest means overcome the down payment hurdle and other obstacles since 1934. To assist borrowers, the FHA insures the first mortgage, making it possible for lenders to approve riskier loans requiring a down payment as low as 3.5 percent. Congress explicitly stipulated that receiving down payment assistance in the form of a second mortgage from a governmental program must not prevent FHA from approving and insuring the loan.
Borrowers with strong credit scores may qualify for a loan to help cover the down payment, while those with poor credit – a score below 600 – may be required to come up with the down payment. Under FHA rules, such borrowers may meet their down payment obligation with gifted funds from approved sources, such as relatives, employers, labor unions, and charitable organizations.
Down payment assistance is often used in conjunction with FHA loans and can dramatically reduce the amount a homebuyer must put down. In some cases, borrowers can use multiple assistance programs to reduce their up-front costs.
The money buyers receive through such programs may take the form of a grant, or an interest-free loan or a deferred payment second mortgage (often called a “soft second”) to be paid off in the future. Typically, buyers must occupy the home as a principal residence for a certain period to avoid having to repay the grant, and must pay off any loan before selling the property.
In recent years, down payment assistance has become an increasingly important piece of affordable mortgage programs offered by state Housing Finance Agencies (HFAs). Established to address affordable housing needs in their states, HFAs are independent entities that administer a variety of housing and community development programs and typically are guided by a board of directors appointed by the governor. About one-quarter of all down payment assistance programs are available statewide through HFAs.
Most programs, however, are offered on a local level through municipalities and nonprofits. Invest Atlanta is just one example. The economic development authority for the city, Invest Atlanta offers seven options that provide down payment help for buyers who purchase a home within the city limits.
Organizations like the Utah-based Chenoa Fund offer down payment assistance on a national basis. Buyers who meet eligibility criteria may receive either a grant or second mortgage to cover their 3.5% minimum down payment requirement when purchasing an FHA-insured home.
A year ago, Chenoa Fund launched an innovative twist on its standard down payment assistance program. Known as Rate Advantage, the new program’s down payments are funded by banks in need of credit under the Community Reinvestment Act (CRA) and results in significant monthly payment savings for borrowers when compared to many down payment programs, which tend to have higher first mortgage interest rates.
The innovative CRA-backed approach is accompanied by an even more intriguing innovation, a web-based marketplace known as the CRA Note Exchange. Open to all providers of down payment assistance who seek liquidity for their mortgage paper (1st or 2nd), the Exchange facilitates the sale of mortgage loans to depository institutions seeking to augment their CRA loan portfolio. The site is searchable by census tract and other criteria relevant to a lender’s CRA performance, and serves as a portal for all holders of CRA-eligible notes to create liquidity that will help purpose driven entities better serve communities in need.
As this new initiative demonstrates, the variety of options for helping homebuyers discouraged by the down payment barrier expands almost daily. With nearly nine out of ten renters expressing a desire to buy a home someday, the lending and real estate industries would be well-served to spread the word about such programs – and encourage more people to begin the path to homeownership and building equity.