The Truth About Down Payment Assistance
Buying a home today is a bit more challenging than it's been in the past, thanks to federal regulations which led to the housing collapse of 2008. Among the most difficult tasks is coming up with an acceptable down payment. And although down payment assistance programs are available to first time home buyers and repeats alike, they are far fewer in number and harder to come by. If you're considering purchasing a home in the next few months there are some important things you need to know about down payment assistance.
Direct Seller Assistance
Prior to the banking laws enacted in 2008, the most common form of down payment assistance came through the seller of a home. The seller would list his house at a certain price then provide a gift of several thousand dollars to the purchaser who would turn around and use it as a down payment. Ultimately, the gift money would be returned to the seller at the closing. This was a streamlined way of achieving a quick sale if the seller had the cash at his disposal.
Unfortunately, due to new banking regulations, that loophole was closed by law – at least as far as FHA guaranteed loans are concerned. Direct seller down payment assistance can still be used with a conventional mortgage, but any mortgage that is tied to the federal or state governments in any way, shape, or form, can no longer use this form of down payment assistance.
One exception to this rule is a scenario in which a parent sells a home to a child. If the two have already agreed to make the real estate deal, a parent can give his child a financial gift prior to the purchase offer being made. Once the purchase offer is made, and the mortgage applied for, the lender is not concerned where the down payment funding came from as long as the applicant has the money in his possession. In some states parents are still allowed to gift down payments for homes being sold to their children by other parties.
Charitable Organizations Offering Grants
Another source of down payment assistance comes in the form of charitable organizations whose mission is to help home buyers get into their homes. These organizations usually target first-time home buyers, but not always. Typically, the organization will take a specific number of applications on an annual basis, depending on the amount of funding they have available. Successful applicants are normally chosen based on need and financial stability.
A sort of legal “money laundering” exists with charitable donations in that a seller could gift down payment money by simply making a donation to a charitable organization. For example, let's say a seller plans to gift $10,000 as a down payment for a buyer interested in his home. He would give that money to the charitable organization which would then turn around and write a check to the seller at the time of closing. The seller receives his money back, minus a small administration fee, and the buyer is able to procure a mortgage without coming up with his own down payment.
While some would challenge the ethical integrity of such a down payment scheme, it is legal in all 50 states. If you think you might like to use this method of down payment assistance, just be sure to use an experienced real estate agent, mortgage broker, and attorney who are familiar with this practice. As long as all the paperwork is in order there should be no problem.
Down Payment Assistance Through State Grants
There is a common myth among many Americans, perpetuated by late-night television ads and internet websites, that the federal government offers free money in the form of grants for down payment assistance. This is absolutely not true. The federal government maintains a website which lists all the grants available along with application details. On the site the agency unequivocally states, many times over, that the federal government does not offer any grants for home buyers looking for down payment assistance. That said the states are a different story.
Every state in the union offers at least one grant program for down payment assistance; most states offer several. Often these programs are targeted at specific demographic groups or are designed for low-income, first time buyers. With all of these grant programs there will be income guidelines. In some cases, there will be restrictions such as where a house can be bought, whether that house can be used as an investment property, and how soon after the purchase the property can be re-listed for sale. Details on the type of down payment assistance your state offers can usually be found by contacting the state housing authority or a local real estate agent.
Local Down Payment Assistance
Major cities all across the country have been fighting urban blight for decades. The problem has been exacerbated with the steady loss of industrial sector jobs since the late 1990s. As a result, many cities are left with hundreds of vacant houses that pose an increased risk for fire and criminal activity. While cities are willing to raze these houses, they would prefer to fill them with new residents. Often they do this by purchasing vacant properties and reselling them at a price well below market value.
Cities and counties that offer such real estate programs often combine them with down payment assistance and rehab grants. An extremely low sale price, combined with down payment assistance, makes many of these homes an attractive option for first time buyers with limited income. However, in almost every case, these houses and financial grants come with strings attached.
Obviously, different municipalities and counties have different requirements and guidelines for administering these programs. While such programs are an excellent way to purchase a home with little or no money down, buyers are taking a risk due to the fact that these are abandoned homes. Most of them will need extensive rehabilitation in order to bring them up to a standard of living commensurate with the local area. Additional remodeling will probably be necessary in order to receive the highest possible resale price down the road.
Down payment assistance for first time and repeat home buyers is available if you're willing to take the time to look for it. Your real estate agent and mortgage broker should have enough information about down payment assistance in your area to get you started.
