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Mortgage News

The little-known way to buy a home with almost no cash down

February 5th, 2015 4:47 PM by Chris Styner

Published: Feb 5, 2015 at http://www.marketwatch.com By Daniel Goldstein

If you think you can’t get a deal much better than a 3% down payment on a home, you might be surprised.

There are more than 2,000 down payment assistance programs nationwide that can drastically reduce the amount of money buyers need to pay at closing. But according to some in the industry, too few buyers and real estate agents know about them.

RealtyTrac, an Irvine, Calif.-based real estate research firm, along with Down Payment Resource, an Atlanta-based company that aggregates programs for real estate agents and buyers, recently identified nearly 2,300 down payment assistance programs.

There are limits on which buyers and homes can qualify for the programs: Those analyzed in the report had an average household income limit of $104,000 and a maximum sales price limit on average of $823,000. But even with those constraints, more than 86% of the 78 million single family homes and condos in the U.S. could qualify for one of them, the report said.

The more lofty the local real estate values, the fewer properties are likely to qualify. For example, according to Realty Trac and Down Payment Resource, only about 30% of homes in San Francisco and New York qualify. But in Wayne County, Mich., which includes the battered real estate market of Detroit, 94% of homes, nearly 1 million of them, qualify for some form of help.

The lack of awareness of down-payment aid is comparable to the situation with Veterans Administration housing-aid programs; while many veterans can qualify for zero-down-payment home loans, experts say too few know about the program.

“Prospective buyers — or their agents — willing to put in a few minutes of time to find out what programs are available to them will put themselves in a much better position to successfully purchase a home,” said Daren Blomquist, vice president at RealtyTrac.

A second loan to cut closing costs

Down payment programs are offered through a wide range of organizations — cities or counties, local housing finance agencies, non-profits or even employers.

A typical down payment program, known as a Community Seconds, works by adding a subordinate low-interest or no-interest mortgage to the first mortgage for the purpose of eliminating or reducing closing costs. The payment is often deferred or forgiven for each year the buyer remains in the home and sometimes has several emergency relief provisions for the borrower, though the loans can have a higher interest rate than the first mortgage.

Other programs include Mortgage Credit Certificates that can provide up to $2,000 in annual tax credits for the life of the loan. There are also programs that provide loans to revitalize downtrodden neighborhoods that have been hit hard by foreclosures.

On average, the amount of down payment assistance (DPA) RealtyTrac and Down Payment Resource was $11,565.

For example, on a $250,000 home with a 3% down payment of $7,500, the closing costs for the buyer could typically add up to another $13,000, once costs such as loan origination fees, broker’s commission, title, recording and transfer taxes were factored in. But a down payment program could lower the closing costs to just $200.

Real-estate pros say that wider use of down-payment programs could supplement recent efforts by the mortgage industry and the federal government to draw more buyers into the market, especially younger buyers struggling to scrape together a down payment.

Late last year, Federal Housing Finance Agency director Mel Watt ordered Fannie Mae and Freddie Mac to begin buying loans that have as little as a 3% down payment (or a 97% loan-to-value ratio), down from its earlier minimum limit of 5% (95% LTV).

RealtyTrac’s Blomquist noted in November 2014 that for a household with the estimated median U.S. income in 2014 of $54,417 it could take more than 12 years to save up for a 20% down payment for a home priced at the median value at a typical annual savings rate of 5.6%, but it could take less than two years to save for a 3% down payment.

Still, the problem, according to RealtyTrac and Down Payment Resource, is that few buyers and agents know about possible assistance. According to a NeighborWorks research study, 70% of American adults don’t even know these programs exist.

“Down payment assistance tends to suffer from lack of awareness,” Mark Hughes of First Team Real Estate, in Irvine, California, told RealtyTrac. “Guidelines and specifics tend to change with economic swings. Agents typically don’t keep up with the changing requirements,” he said.

Another problem: Despite the availability of down payment help, some buyers who use down payment programs still lose out on purchases when they compete with buyers who can put the traditional 20% down or make all-cash offers. That will change when more inventory comes on the market, said Greg Smith, a broker at Re/Max Alliance in Denver, “Overall I think the new low-down programs will help long term, but may take time to have any real impact,” he told RealtyTrac.

To check and see if a property could be eligible for a program, you can go to the down payment resource eligibility search engine.

10 U.S. counties with most homes qualifying for down payment help

StateCountySingle family homes
& condos
in the county
# that qualify for
down payment
% that
CALos Angeles1,762,2561,377,81378.18%
CASan Diego717,165618,05086.18%


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