Housing prices are rising in many parts of the country, which makes it tough for people to buy a home. Luckily most people can get a mortgage to help pay for a house, but almost all mortgages still require a down payment and closing costs. The down payment can range from 3 percent to 5 percent of the loan amount for the cheapest loans available. Closing costs consist of lender fees, an appraisal, insurance, prepaid interest, title fees, closing company fess, and can be 2 to 5 percent of the price of the home. On a $200,000 home, a buyer may need $10,000 in cash to cover the down payment and closing costs using a low-down payment loan on an owner occupied house. If you are an investor, you will need much more money! Luckily there are down payment assistance programs and other ways to reduce the cash needed to buy a house. In fact many owner occupant buyers can buy a home with as little as $1,000 in Colorado and other states. In this article I have some help explaining how down payment assistance programs work from Mike Bowen, a lender with Guild Mortgage in Colorado.
What are down payment assistance programs?
Down Payment Assistance (DPA) programs are available in some shape or fashion in most states. While in the past these programs were reserved for only first time home buyers, today most are open to any person or persons that meet the income limits and qualify based on income and credit. Colorado is fortunate to have many great programs that offer free money in the form of non-repayable grants. The grant is used to offset the buyer’s down payment and/or closing costs and ranges from 3 to 4 percent of the total loan amount. Depending on which loan a potential buyer qualifies for (most commonly FHA or Conventional) the grant can pay for all or most of the minimum down payment required. The real value in these programs is that it allows a buyer to get into a home with a minimum of $1,000 total out of pocket. Since the grant is non-repayable the only negative would be that the interest rates on these program are about .25 to .50 percent higher than a loan without down payment assistance. A .25 percent interest rate increase would mean your house payment would be about $30 more a month on a $200,000 loan.
Do other states besides Colorado offer down payment assistance programs?
Fortunately for buyers across the country, Colorado is not unique in its offering of down payment assistance programs. For example, Arizona has a few key programs with similar grants to CO but with some different guideline restrictions. Also, California offers CalHFA which is very similar to Colorado’s CHFA program. Many other states offer down payment assistance programs and there are national loans like VA and USDA that offer lower down payments as well.
How do you qualify for down payment assistance?
Qualifying for a loan with down payment assistance is fairly straightforward. Since these loans follow normal FHA and Conventional guidelines, you typically need a minimum credit score of 620, a solid two year work history, and $1,000 into the deal to be considered. You will also must have a decent debt to income ratio, which calculates how much money you make compared to how many debts you have. If you have had a recent bankruptcy or short sale that may also make it tough to qualify for a loan. If you have any questions about your ability to get a loan based on your credit score, a bankruptcy or other issue, talk to a lender as soon as possible. A lender can tell you what you need to do to fix any problems, and they won’t charge for it. Many credit repair companies will charge a lot of money to fix issues that are easily repairable.
How can you find a great lender who knows about down payment assistance programs?
Not every lender knows about grants and down payment assistance programs. In Colorado you have to be an approved lender for some of the programs, and lenders who are not approved may not tell consumers about all the options available. When looking for a lender with experience with these programs, I recommend going directly to the program’s website and search for “top lenders.” From there you will see a list of reputable lenders in your local area. Then, you can conduct phone interviews to find a good personality fit as well as finding a lender with the experience necessary to get your loan done smoothly and on time.
If you are working with a great real estate agent, they may be able to recommend a really good lender as well. Once again, not every lender works with these programs so make sure to ask about down payment assistance programs. Do some research on your own to find out what programs are available in your state and make sure your lender is telling you the entire story!
What are some other ways to decrease the amount of cash home buyers must have?
Even if you do not have access to down payment assistance programs, there are ways to decrease the amount of cash needed to buy a home. There are some loans that require no payments, which I mentioned earlier.
- VA: VA stands for Veterans Administration and offers loans to veterans and the military. VA loans are fantastic products, which can have down payments as low as $0 with no mortgage insurance. The VA loan is not available to everyone.
- USDA: USDA stands for United States Department of Agriculture and they offer loans as well. USDA will lend on properties in certain rural areas of the country and offer zero down loans as well.
Not everyone will qualify for these loans, but there are still some ways to decrease the cash you need to buy a house. Many times the buyer can ask the seller to pay for some or all of the closing costs. If the closing costs will be about 3 percent of the price of the home, the buyer can write into their offer that the seller will pay those closing costs. The seller does not have to agree, and it can make your offer less desirable in a competitive market. Having the seller pay the closing costs can sometimes make it harder for a house to appraise as well. However, if you have a great real estate agent and lender, you should be able to get a deal done with the seller paying all or part of your closing costs.
Buying a house can be very expensive even with low-down payment loans. Thanks to down payment assistance programs and other strategies, the money a buyer must have can be greatly reduced. One thing is for sure, these programs offer the dream of home ownership to those that would not otherwise be able to buy a home. I want to thank Mike Bowen for providing much of the information in this article and you can reach him here.