What is Down Payment Assistance (DPA)? In simplest terms, Down Payment Assistance is a method of mortgage financing through FHA (Federal Housing Authority) which helps home buyers save out of pocket expenses. Many home buyers have adequate credit to qualify for a home loan, but do not have the cash to cover the combined expenses of closing costs and down payment. Average closing costs on a $175,000 conventional loan are approximately $6000 (including loan costs and establishing escrow accounts). The minimum down payment required is 10%. On a home with a purchase price of $175,000, the 10% down payment comes to $17,500. Adding to that the closing costs of $6000, a buyer of a $175,000 home would have out of pocket expenses of $23,500. Not many Americans have access to that kind of cash.
The FHA used to offer loan programs which allowed the seller of the home to surrender part of the purchase price back to the buyer in order to help the buyer with his out of pocket expenses. The seller could surrender enough cash back to the buyer to cover loan expenses, down payment, and all fees. This type of assistance allowed the buyer to purchase the home without having to pay any money out of his pocket. This program has been discontinued due to the overwhelming number of foreclosures on loans made under this type of down payment assistance. Because the buyers who used this program had no funds of their own invested, they stood to suffer no financial loss upon foreclosure. One big motivation to keep up mortgage payments is to avoid losing one’s investment. These buyers did not have that motivation.
Furthermore, sellers would inflate the price of the home in order to cover the assistance. For example, if the seller wanted $175,000 for their home, they would agree with the buyer to add the costs of the loan, down payment and fees onto the price of the house. That way, the seller wasn’t really losing anything by assisting the buyer with is expenses. This gave the appearance that home prices were increasing, and they were, but the increase was not benefiting the sellers of homes. The increase was making the banks richer, and giving a false sense of security that the economy was growing. This false sense of security has helped put our economy in the mess it is in today. This particular program should never have been made available. It allowed too many people to buy homes who did not have the financial ability to buy. Now the entire economy is paying the price.
Down payment assistance programs do still exist, however, the assistance cannot come from a party who is involved in the transaction. In other words, the seller can no longer assist the buyer. However, almost all loan programs will allow assistance in the form of gifts from outside parties. In other words, family or friends can submit a letter to the lender stating that the money the buyer is receiving is a gift. However, anyone wanting to help the buyer needs to be informed that helping a buyer financially involves more than just writing a check. The giver will have to submit documentation that the funds are from a legitimate source. Documentation can be troublesome to acquire, and will have to be acquired by the giver himself. Adequate documentation must be in the form of authorized bank statements, broker statements, etc. The loan officer will instruct the giver in how to provide adequate documentation.
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