The Down Payment Assistance Market

Primarily down payment assistance grants are available from two different types of services. First, government subsidized programs, and second, charitable organizations that utilize a HUD/FHA rule that allows for Down Payment Assistance (DPA) to be given to the homebuyer in the form of a gift or grant.

Each type of Down Payment Assistance has its own pros and cons: Below is some information about both types of services and types of grants available.

Government subsidized programs are typically targeted towards lower to middle income families. They will have set income restrictions and might dictate where and what types of homes are eligible to be purchased. In some cases, only first time homebuyers will be eligible. Another major downside is most of these program grants are actually in the form of a forgivable loan. This is also known as a "silent second" loan. The homebuyer will receive the "grant" that will cover the down payment, however they must agree to live in the home for (in most cases) 15 years before the loan is forgiven. If they were to sell the home and move, prior to the time limit, they will be required to re-pay the loan. The amount that is to be repaid is usually pro-rated based on the length of time they lived in the home. Another potential downside to the government-based programs is the amount of paper work and extra work it creates for the loan originator. A large percentage of loan originators will not even work with people that require these programs based on the amount of additional work that the government requires in order to process them. I am sure that will change as the market conditions and interest rates also change.

Also most major lenders offer their own type of "No Down Loan". These are almost always in the form of "Silent Seconds", and will usually have a higher interest rate attached to the second, will require a much higher credit score and will actually have a large percentage of the secondary loan principle built into the closing costs.

The single biggest PRO for these types of programs is the ability to use them with almost every type of loan product on the market including conventional, non-conforming and FHA loans.

Charitable Organizations that are allowed to provide Down Payment Assistance Grants or Gifts are relatively new. The whole industry is only about 6-7 years old and was founded by a 501c3 in California called The Nehemiah Program. Shortly after they developed a market for the industry literally hundreds of other groups formed to provide Down Payment Assistance gifts to homebuyers. This in and of itself is probably the single biggest negative facing the industry. While programs like The Nehemiah Program and Neighborhood Gold and The Buyers Fund have helped literally thousands of homebuyers buy their homes and spent millions of dollars helping the less fortunate, an alarming number of the 200 other Down Payment Assistance organizations actually "rent" a 501c3 from a local organization, then embark on providing DPA grants to home buyers. These organizations will end up keeping on average $500 per closed transaction, while the actual "community charity" only receives in some cases $25 for the same transaction. When you actually look at the real numbers of loans being closed nationwide using charitable grants you quickly realize why so many companies jumped on the bandwagon. By mid 2003, the Down Payment Assistance Gift industry was "helping" an estimated 17,000 families per month. Each closed transaction would pay the Down Payment Assistance marketing company between $350 - $750. That means the whole industry is doing somewhere between $70,000,000 to over $100,000,000 per year, and the Down Payment Assistance organizations that are renting the tax exempt status are making millions of dollars every year on the back of a legitimate 501c3 Charitable organization.

In 2002 a few Down Payment Assistance organizations took a much-needed approach to fixing these issues. Organizations such as The Nehemiah Program and Neighborhood Gold / The Buyers Fund along with a few others formed a national association. One of the top priorities for the association was to establish a uniform code of ethics and to help police their own industry. That is why only Down Payment Assistance organizations that are active members of the national association will be recommended by this web site.

One other issue to their industry is a simple misconception within the home buying industry. It is based on a perception that a seller will make less money for agreeing to sell their house to a homebuyer who needs the help from a Down Payment Assistance, or that the home price has to be inflated to cover these "additional" costs, putting pressure on the appraisal of the home.

When the Down Payment Assistance transactions are done correctly, these perceptions are absolutely false. It is a matter of simply educating the home buyers and sellers and in some cases the real estate agents on how to structure the buyers contract offer, and show the seller what our organization calls a "Net Sheet". The "Net Sheet" will itemizes the costs to the seller, including realtor commissions, closing costs and the Down Payment Assistance fess. The bottom line will show the seller exactly what they will make by accepting the offer.

The Down Payment Assistance Organizations have done a great job educating the mortgage industry on the advantages to their programs, and to some extent the Real Estate industry although the majority of real estate agents are still lacking in over all knowledge of the potential effectiveness.