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Down Payment Assistance Program | Homebuying Guide 2016

3 down payment assistance grantsWhat is a down payment?

A down payment is the amount that you actually require to pay upfront while you purchase a home.

It is usually combined with the mortgage loan that you take to purchase the home.

The down payment amount coupled with your credit report and LTV ratio has a major impact on your loan approval process.

Typically, the higher your down payment amount, the lower will be the amount that you are going to pay each month towards your mortgage. The down payment amount depends up on your loan type and may vary anywhere from around 3.5 to 20 % of the asset value.

Practically speaking, the task of saving 20 percent towards down payment might be very tough and might even take many years for first-time homebuyers with low or median household incomes.

It is for this group of people that various other lower down payment mortgage programs are offered from the Federal Housing Administration (FHA). Most of the FHA loans require a mere 3.5 % down payment along with a decent credit score for eligibility.

In addition to this attractive feature, the FHA Loans are federally insured which reduce the risk of loss to the lender if in case a borrower defaults on their monthly mortgage payments.

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How to Calculate How Much Down Payment You Can Afford?

Whether you are a first time homebuyer or looking to purchase and move on to a new home, there are various factors that you should analyze before making a decision about a mortgage type. It is important that you consider your current flow of liquid cash and your ability to make monthly payments while deciding on the amount of down payment, since both the amount of down payment greatly influences your monthly mortgage amount.

 

While determining how much you can afford as Down Payment, you will have to consider the following aspects:

  • Consider all your liquid assets.
  • Understand the actual down payment requirement for the mortgage type.
  • Analyze the various additional assistance programs that are available.

 

While going in for FHA loans, you have to do a deep research on the additional down payment assistance programs. In order to get the best deal, you must:

  • Go in for a private mortgage insurance (PMI)
  • Have a fair credit score (usually over 620)
  • Provide proof of a stable income and employment.
  • Have a solid asset.
  • Attend homeownership counseling to have a better understanding of the home loan process.

 

Calculating Your Maximum Monthly Payment:

It is important to understand your financial position and your ability as to how much monthly payment you can afford for a monthly mortgage. While approving your home application, lenders generally consider various factors such as your debt-to-income (DTI) ratios, your LTV and many more.

  • Calculate all your monthly incomes.

  • Calculate your monthly obligations.

  • Determine the possible monthly mortgage amount that can you can afford.

  • Increase your income earning capacity, thereby increasing your ability to pay.

 

Selling Your Current Home to Afford a Down Payment:

If you already have your own home and are looking out to move in to a new house due to various reasons, then you can consider the option of selling your current house so that you will have enough liquid cash to pay your down payment. By going in for this option, you will be definitely left with enough and even surplus cash for your down payment, which will bring down your monthly mortgage obligation.

 

But while going in to sell your house, remember to understand all the pros and cons in buying and selling a house at the same time. And do not be in haste in taking selling decisions and be calculative enough to gain profits from the sale.

 

FHA Loan:

The Federal Housing Administration (FHA) is part of HUD that insures your loan, so that you can get a better deal from your lender. FHA loans are the most preferred loan by most homebuyers due to the great benefits it offers, particularly for first-time homebuyers. Its fascinating features include

  • Lower down payment amounts

  • Easy and faster processing

  • More flexible eligibility & underwriting terms

  • Lower mortgage insurance rates

  • Lower closing costs

The FHA loans have helped people realize their dream of becoming homeowners since 1934.

The minimum down payment required for a FHA loan is 3.5% at present. This might seem to be a relatively smaller amount, but many people actually battle to accumulate this amount for making the down payment.

It is to bridge this gap that the down payment assistance programs comes into picture. This program offers eligible borrowers financial assistance to cope up with the required down payment.

The FHA loan also offers other services such as:

  • FHA Reversal Mortgage – This is exclusively for senior citizens aged above 62 who live in their own home. This program provides an option to them to convert part of their assets to liquid cash.

  • FHA Energy Efficient Mortgage – This program allows you to include energy improvement costs.

  • FHA loans for Mobile Homes & Factory-built housing.

 

3 fha loanFHA DTI (Debt-to-income) Ratio Requirements:

When a person applies for a FHA Mortgage, it is mandatory that he has to disclose all correct financial facts about him that states all the assets and liabilities that he possesses. It is based on this information that the borrower’s DTI ratio is calculated.

 

FHA lays down a maximum DTI ratio that can be acceptable for approving the loan. According to the FHA official site, “The FHA allows you to use 29% of your income towards housing costs and 41% towards housing expenses and other long-term debt.”
These numbers might seem to be a little high for few people; it is for such people that the FHA offers some flexibility in the debt-to-income ratio requirements given that the borrower has made a large down payment and has sufficient net worth.

 

Combination of Assistance Programs:

There is quite a lot of local assistance down payment programs in the market that can be clubbed together with each other or in combination with an FHA loan. These additional down payment assistance programs prove to be act as a supporting factor to the primary loan taken. These assistance programs taken not only aids in pooling the down payment amount but also help in repayment of the loan. Using the aid programs brings down the principle loan amount, which in turn lowers the LTV ratio. These programs make the first time homebuyer down payment indeed an achievable task.

 

Down payment Loan Programs:

Down payment Loan programs often does the role of soft second or third mortgages or grants. They provide numerous benefits such as:

  • 0% interest rates

  • Deferred payments

  • Forgivable loans.

The additional down payment assistance amounts (after actually paying off your down payment amount) can be used for various purposes like:

  • Closing costs

  • Prepaid

  • Principal reductions

  • Repairs

The program benefits and eligibility requirements vary depending on the area’s MI (median income) and Real estate prices. The aid benefits are worked out most commonly based on income and household size.

Each housing finance agency will have different target areas for them. If you happen to purchase a house in that targeted area, then you are lucky enough to receive special benefits like increased assistance amounts and more flexible eligibility criteria.

DPA Programs:

There are three main types of down payment assistance programs available to homebuyers. They are grants, second mortgage loans, and tax credits.

  • Grants – Grants are funds that you can avail absolutely free and do not have any obligation to pay back until you own and reside in your home.
  • Second mortgage loans – These are the most common DPA assistance programs that help people to arrange for their down payments. Most of the second mortgage loans offered by federal governments have very low or 0% interest rates and are even postponed over a specified period of time. What more, the loan is mostly forgiven over time.
  • Tax credits– Some states and local governments along with housing finance agencies, issue mortgage credit certificates. This certificate can be used to reduce the Income tax amount you pay to the federal government. This actually helps you save a lot of money, which can be used for various purposes like down payments, closing costs or other repair and augmentation expenses.

3 first time home buyer down paymentDown payment Grants:

A DPA grant is one factor that comes as a real boon to homebuyers in getting their down payment on a house. It reduces the costs of the homebuyer and prevents him from falling into debt trap. It also reduces the occurrences of property liens related to ancillary financing options.

The exciting features that attract more borrowers towards these Down Payment Grants are:

  • The DPA grants are absolutely offered free and need not be repaid

  • This helps borrowers to create a good credit score by actually reducing their debts.

  • Increases the chances of more and more people aspiring to become homeowners, realize their dreams.

 

First Time Home Buyer Down payment:

First time homebuyers are offered with an array of low cost down payment loan options. These Mortgage programs actually help many people to realize long dreamt dream of owning a home. With lot of additional assistance programs related to down payment and PMI, the task is made even easier.

 

Tips to First Time Home Buyers:

  • Formulate and follow a real time practical budget

  • Get pre-qualified even if you are not ready for a mortgage. This is just to know your current position.

  • Keep your debts low.

  • Keep a close watch on the market and real estate price fluctuations

  • Understand the various mortgage programs.

  • Work on creating a credit score.

  • Save more for your down payment.

  • Research on various additional assistance programs.

  • Discuss and debate with your lender for best offers.

  • Keep your credit cards low.

  • Don’t go in for new debts or credits.

  • Decide upon the region and locality of your home.

  • Focus and work seriously on your goal.

 

Just there are a hundred reasons to go in for your new home. You ought be wise enough to judge whether you are ready to go for a mortgage or you still need time. This is going to be lifetime decision and has to be taken after proper analysis of both the market and your financial status. It takes real patience, finance and responsibility to be ready to buy a home.

 

The FHA Ratio Factor:

In order to avoid homebuyers from getting into a financial trap by buying a home they cannot actually afford at that given point of time, there are a predefined set of principles and requirements laid down by the FHA that requires the borrowers to prove themselves eligible based on the DTI (debt to income) ratios.

 

Basically there are two types of Ratios for determining the financial viability of the borrowers. They are as follows:

1)      Mortgage Payment Expense to Effective Income

To determine this ratio, one has to sum up the total mortgage payment amount that includes the monthly principal and interest repayment amount along with all other expenses related to mortgage like the escrow deposits for taxes, mortgage insurance premium, etc. This amount has then to be divided by the gross monthly income.

 

The maximum qualifying ratio for FHA approval is 31%.

 

Let us understand this calculation with a simple example:

Total Monthly Mortgage Payment

$ 500

Gross Monthly Income

$2500

Monthly Mortgage Payment Amount

Gross Monthly Income

$500

$2500

DTI Ratio

20%

 [PDF]Section F. Borrower Qualifying Ratios Overview – HUD

2) Total Fixed Payment to Effective Income

To determine this ratio, one has to sum up the total mortgage payment amount that includes the monthly principal and interest repayment amount along with all other expenses related to mortgage like the escrow deposits for taxes, mortgage insurance premium, etc. and all recurring monthly expenses like car loans, personal loans, student loans, credit cards, etc. This amount has then to be divided by the gross monthly income.

 

The maximum qualifying ratio for FHA approval is 43%.

 

Let us understand this calculation with a simple example:

Total Monthly Mortgage Payment

$ 500

Total Monthly recurring expenses

$ 400

Gross Monthly Income

$ 2500

(Monthly Mortgage Payment Amount + Monthly recurring expenses)

Gross Monthly Income

$500 + $400

$2500

DTI Ratio

36%

 

This DTI factor along with other factors such as the borrowers credit history, employment and assets play a vital role in the approval of FHA loans.

 

Inference:

Having discussed in detail about the FHA loan and FHA down payment assistance grants, you are sure to have a clear and wide perspective of the FHA Mortgage market.  As a first time homebuyer it is important to keep a close watch on the market to avail the best offer in the market.

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