September 26, 2023

Homebuyers ease initial costs with down payment assistance (DPA) programs

A myth has persisted for decades about needing at least 20% of a home’s purchase price to successfully obtain a mortgage, and a surprising number of Americans still believe it.

National surveys show 35% of consumers think a down payment of 16% to 20% is required while 10% say more than 20%. But according to the National Association of Realtors (NAR) the average down payment for first-time 2022 homebuyers was 6% to 7%.

First-time or repeat homebuyers often qualify to receive assistance in covering initial homebuying costs through various down payment assistance (DPA) programs. There are more than 2,500 public and private DPA programs available, but research indicates only 23% of consumers know about them.

One of the most widely used DPA programs comes from the Federal Housing Administration, established by Congress in 1934 to reduce lender risk and make it easier for borrowers to qualify. FHA borrowers can qualify with as little as 3.5% down payment and credit scores as low as 580.

First-time homebuyers often find FHA loans appealing since they area allowed to use their savings, financial gifts from family, or DPA grants to cover the down payment.

To mitigate risk, the FHA requires borrowers to pay private mortgage insurance (PMI) payments in case of default. After an upfront premium (UFMIP) of 1.75% of the base loan amount, the borrower pays annual premiums divided into 12 monthly payments.

These payments are made either for 11 years or the entire loan term, depending on factors like the loan length and loan-to-value ratio. The Biden administration recently reduced annual premiums from 0.85% to 0.55% of the base loan amount resulting in savings of about $800 per year for the average FHA buyer.

FHA loans have limits on borrowing amounts, determined by the median home price in the county. The FHA website allows borrowers to look up the loan limits for their county.

The FHA loan program remains a valuable option for many individuals and families looking to enter the housing market.

Another popular federal DPA is the Veterans Affairs (VA) Guaranteed Home Loan program for active military personnel, veterans, and their surviving spouses. VA loans offer 100% financing and stable monthly payments.

The U.S. Department of Agriculture (USDA) rural home loan program is another DPA for low-to moderate-income buyers. There is no down payment required and no private mortgage insurance, so USDA loans can be a great tool.

However, buyers must meet certain income and credit requirements and purchase property within specific areas outlined by the USDA - with populations below 35,000.

At Bay Equity Home Loans, our loan officers can help explore the various DPA programs and provide valuable guidance and assistance throughout the homebuying process.

Ultimately, owning a home is not just a financial investment but also an investment in one's community, future, and dreams.