DPA programs are a boon amid mounting affordability pressures

DPAs have become a saving grace for many buyers who aren’t able to pay a lump sum at closing

The combination of high home prices and insufficient savings for a down payment makes it challenging for first-time homebuyers to pull the trigger on a property purchase.

But the good news is, more buyers have become aware of down payment assistance (DPA) options and are tapping into available resources for help, said Susanne Saller, a senior consultant at Caliber Home Loans.

And that’s how Saller’s clients — siblings in their early 20s — can close on a $335,000, three-bedroom condominium in Jackson, New Jersey, early in March. They’re using a DPA program through the New Jersey Housing and Mortgage Finance Agency (NJHMFA).

“They made good money, but with student loans and car payments, they didn’t have the money for the down payment and closing costs,” Saller said.

Through the New Jersey DPA program, the siblings were able to get a 30-year conventional loan at a 6.88% interest rate, accompanied by a $15,000 second mortgage with 0% interest rate, which will be forgiven if the borrowers live in the home for five years.

“Everybody needs some kind of assistance in buying a home,” Saller said. “Every call I get, if they are first-time homebuyers, they ask, ‘Where can I get money for a down payment or closing costs?’”

Amid mounting affordability pressure on homebuyers, DPAs have become a saving grace for many borrowers who don’t have the savings or other resources to pay a lump-sum down payment. 

Eligibility for DPA programs is determined by multiple factors, including household income and credit scores. How much money a buyer receives depends on the program, with some offering a percentage based on the home’s sale price, while others cap assistance at a certain dollar amount. 

More than 2,000 DPA programs are offered through state, county and city housing agencies across the country. They come in the forms of grants, second mortgages, deferred loans and forgivable loans. And nonbank mortgage lenders have joined in to offer bond programs, in-house DPA programs or DPA-oriented programs for borrowers to increase the size of their origination pie. 

“If, ultimately, somebody is in a position where the down payment is restricting them from buying, and what bridges the gap is a second loan at a little bit higher interest rate, I do think it’s beneficial because if the alternative is to keep on renting, why wouldn’t they buy a house?” said Michael Ullmann, a producing branch leader at Movement Mortgage

Benefits of owning and building equity

Of the various DPA options available — including government-sponsored DPA programs, nonprofit-driven programs and employer-assisted programs — Federal Housing Administration (FHA) loans layered with a DPA benefit have grown in popularity.

On FHA endorsements for home purchase financing, approximately 40% included down payment assistance in both 2022 and 2023, while the share was roughly 30% in 2021. The DPA share in FHA’s total book of business, including refinances, was 27% as of October 2023.

It’s the first-time buyers who are taking advantage of DPAs for FHA loans, said Miki Adams, president of CBC Mortgage Agency, a federally chartered housing finance agency. CBC Mortgage is the provider of the Chenoa Fund, a national DPA program that comes in repayable and forgivable options.

“About 75% of our borrowers are first-time homebuyers and roughly 49% of our borrowers are minorities,” Adams said. “That number had hovered just above 50%, but it’s lower because of the current affordability issues.”

Most DPA programs offer a repayable or forgivable component for the second mortgage. For example, a borrower at CBC Mortgage could opt for a repayable 10-year term with an interest rate matching that of the first mortgage, or forgivable loan with a 30-year term and an interest rate of 0%.

The forgivable option at CBC, which doesn’t require a monthly payment on the second mortgage, is removed from the second-lien position after either 36 or 120 consecutive on-time payments on the FHA first mortgage, depending on the DPA percentage. 

Another national DPA provider, Arrive Home, offers a repayable product that comes with a 10-year term and a fixed interest rate that is 2% higher than the rate for the first mortgage. 

Arrive Home’s forgivable DPA option provides a 30-year term with no interest and no monthly payments. The second lien is removed at the borrower’s request after 36 consecutive on-time payments on the first mortgage.

While it could be costly to get a DPA loan — especially with a repayable DPA that comes with a higher interest rate — borrowers who qualify for the program have the benefit of retaining a savings reserve while getting into a new home, according to Tai Christensen, president of Arrive Home.

“You are going to be making a payment if you are going with the repayable option,” Christensen said. “The beauty of doing the repayable option and having the second mortgage is you have to qualify under the qualified mortgage guidelines. So, if you don’t have a down payment to put toward your own balance, then you really don’t have another option other than using down payment assistance or saving (and) hoping that market conditions change.

“Either you take all the money from your savings and you have nothing left in your reserves, or you get a DPA loan and you pay it back slowly over time.”

Challenges of DPA programs

DPA programs aim to help borrowers build equity while paying less upfront, but prospective buyers face the challenge of having to sift through the various options available and find at least one program they qualify for. 

Grants have limited resources, and different DPA programs may have different income limits or purchase price limits that borrowers are required to fulfill.

Every city, county and state have different underwriting guidelines. And if the DPA loan does not come from a national DPA provider, loan officers need to have underwriting guidelines rewritten to the DPA provider’s standards, which could take longer than getting a conventional loan.

“A lot of these programs that I’ve heard of could take 45 to 60 days to get to the finish line. In a lot of cases, the seller is not going to wait 45 to 60 days when they have an offer on a 30-day contract,” said Adrian Gastelum, a senior vice president and branch manager at Nova Home Loans.

In addition, homebuyers might have to deal with sellers who are reluctant to sell their homes to DPA borrowers. There’s a stigma that down payment assistance programs are inferior, which often stems from the perception that buyers with DPA won’t be able to cover the gap if the appraised value comes in below the listing price. 

“A lot of sellers are going to take those conventional buyers who are putting 20% to 25% down, versus an FHA loan, especially with down payment (assistance), because there’s always that fear that if the house doesn’t appraise, these people aren’t going to have the money to come up with a difference,” said Justin McCrone, a loan officer at Atlantic Coast Financial Services

Nonbank lenders want a slice

Nonbank mortgage lenders — including Movement Mortgage, Caliber and loanDepot — have rolled out DPA programs for FHA borrowers that enable them to put no money down upfront.

Lenders will qualify FHA borrowers to cover the required minimum down payment of 3.5% and even a portion of closing costs, depending on the program. 

“It’s really about access to credit. We’re enabling people to get into homes and begin building equity who otherwise might not be able to,” said Laura Bowles, chief financial officer at Movement Mortgage.

Demand for DPA programs at Movement — including state bond programs, the proprietary Boost program to cover the entire 3.5% FHA down payment, and its special purpose credit program (SPCP) — represented about 5% of the company’s total origination volume in 2023.

“I would expect that to continue to grow to be north of 5%, so my expectation is they would be about 5% to 7% of our total volume in 2024,” Bowles noted. 

While DPA layered with an FHA loan is more common, nonbank lenders — including Rocket Mortgage, United Wholesale Mortgage and Guild Mortgage — have rolled out conventional DPA programs where the lender covers 2% of the required 3% minimum down payment for a conventional loan.

These products function like a modification to Fannie Mae’s HomeReady and Freddie Mac‘s HomePossible programs, which allow a 3% down payment — or what lenders refer to as 97% loan to value (LTV) — on conventional loans. 

“We put the money directly into the program itself,” said Bill Banfield, executive vice president of capital markets at Rocket Mortgage. “So, the client is benefiting directly and, you know, we’re addressing really what’s the No. 1 hurdle for anybody buying a home — especially when they make less than 80% of their area median income — which is saving for down payment.”

Rocket’s downpayment-oriented programs include ONE+ (a conventional loan with 1% down) and Purchase Plus, a special purpose credit program that offers up to $7,500 in lender credits for first-time buyers in underserved communities.

“The array of affordable programs is like a supplemental offering in general,” Banfield said. “There’s more than one option on the menu, and we think consumers should have choices as far as what they’re looking at, trying to deal with how homes have become much less affordable in the last few years.”

Due to lower origination volumes and higher interest rates, mortgage lenders are “pushing the envelopes again,” said Bill Gourville, president at Atlantic Coast Financial Services.

“They in the past shied away from it just because there were other volumes to be had,” Gourville explained. “So, they’re consistently pushing the envelope on programs that have technically always been available by agencies — Fannie Mae, Freddie Mac, FHA and VA — but now they’re rolling it back out.”

The demand for DPA programs will only grow this year due to the increasing awareness of the options, as well as high home prices, mortgage professionals told HousingWire. And more lenders and housing agencies are expected to roll out DPA options or modify qualification requirements to make DPA loan qualification easier for borrowers.

“Competition is only going to benefit the consumer, which at the end of the day will get more people into homes,” Arrive Home’s Christensen said. “So, the more innovative programs we can get out there to help a wide swath of Americans that are trying to get into homes, that’s ultimately going to benefit the market as a whole and not just individual sectors.”

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