have been around for
many years to help homebuyers make
downpayments, but the programs are fragmented throughout the country and often
changing. Consumers, lenders and Realtors often aren’t aware of the programs or
their requirements. In 2008, Down Payment Resource was founded. The Atlanta-based company has
since established a database, which is updated regularly, that
matches available programs with eligible properties for sale on
multiple listing services. Chief Executive Officer Rob Chrane spoke with
Scotsman Guide News about trends in downpayment assistance.
What are downpayment-assistance programs and how do they
differ from piggyback loans?
Downpayment-assistance programs typically come from housing-finance agencies [and] governmental agencies.
For example, at the local level, maybe an economic-development department wants
to create some housing incentives, and then sometimes nonprofits [do as well]. The idea is
to help people overcome the number-one hurdle to homeownership, which is the
downpayment. Some of the downpayment assistance may be in the form of a grant.
Obviously if it is a grant, [there] is a huge difference between [it and] a piggyback mortgage because there is no
repayment at all. A lot of the downpayment programs do need to be repaid under
one of three circumstances. One would be when the home is sold. Another would
be if the homeowner refinances. A third would be if the homeowner moves out of
the house, but keeps the property and converts it to a rental property. These
are often referred to as a soft second mortgage. Typically, those do not have
any monthly payments. They are just repaid at one of those three events. That
is much more preferable than getting a piggyback [loan] because that second
lien to make the piggyback, whether it is a second line of credit or a
second mortgage, is definitely going to have monthly payments, and it is going to be an interest rate that is
going to be higher than the first mortgage rate.
How long have downpayment-assistance programs been around?
The programs have
actually been with us a long time, at least
more than 20 years. I can remember them going back to the early ‘90s and maybe
before then. They just are not very well known. In
our database, we have almost exactly 2,400 programs across the country. They also include some other types of
homeownership help. One example that is not downpayment help, but is a great
benefit to homebuyers, is what is called
mortgage-credit certificates. Those are a
direct federal-tax credit as opposed to an interest deduction. There are some
variables that determine how much of a tax credit, but the maximum is $2,000 a
year for the life of the loan. It is not money upfront to get into the home,
but it is money that can add up and be substantial. Then there are
programs that are a combination of first-lien mortgage and some kind of
downpayment help. The vast majority of homebuyers, particularly
first-time homebuyers, have no idea that this help exists.
Are most people using downpayment assistance to
complete an FHA loan?
The first mortgage that they are doing would typically be an
FHA loan, although there are a lot of opportunities to layer these with a
conventional loan. Both Fannie [Mae] and
Freddie [Mac] have first-mortgage products
that will allow this type of downpayment help. Historically, the first-mortgage
product that is usually associated with downpayment assistance would be FHA.
Are there any disadvantages in using these programs?
Bottom line, I would say, there are no disadvantages. It is
an extra step in getting your financing together. Not every lender chooses to
offer these programs or participate in them. We looked at a sample of
transactions, where downpayment assistance was used.
We compared the days on market to similar-priced homes in that same market
that didn’t have downpayment assistance. In about four or five instances where
we tested this, [in] all but one, the days on the market were shorter than a regular listing when these
programs were used. It is an extra step. It takes
a little more effort, but when you think about the benefits you can gain, why
not go the extra effort?
Do you expect the decline in the
use of these programs as the economy improves?
No. I really expect them to be
used more. I think what drives it is demographics. We all hear every day
something about millennials. That group is just in their early
household-formation years. Regardless of your socio-economic class, it is hard to come up with a
downpayment. Over the coming years, we are getting ready to have a lot of new
homebuyers, and the downpayment is going to be an issue for them. The demand
will increase, and I think these programs will proliferate.