Down Payment Assistance Programs - Let's Review

Now that a Federal Judge has at least temporarily blocked HUD from doing away with Down Payment Assistance Programs (DAP), we thought it might be a good time to review their requirements. Many first time homebuyers need this type of help and since HUD has filed an appeal, using this window of opportunity might make sense, especially with the recent drop in mortgage interest rates.

DAP programs permit the seller to contribute up to 6% towards down payment and closing costs for the buyer for a small charge collected as a fee by the non-profit organization. The typical charge is from $250-$500, depending on the provider and the amount of the assistance.

When used in combination with a FHA loan program, buyers can essentially purchase a new home with very little out of pocket expense. The minimum down payment for FHA loans is 3.00%, and if the seller decides to provide the additional 3.00%, those funds can be used for closings costs, prepays or discount points to buy down the interest rate for the buyer. Just be certain that the sales contract reflects what portion of the assistance is for down payment and what is for closing costs and remember that any unused overage must be used to lower the final sales price.

Requirements for Down Payment Assistance Programs:

• All DAP purchases must appraise for the amount of the purchase or better;
• The Borrower must qualify for the needed loan;
• It must be combined with an FHA home loan;
• The Sales Contract must contain the amount of the down payment and closing costs expressed in either a percentage (not to exceed 6% for both down payment and
• closing costs), or a dollar amount of the sales price;
• The Buyer must sign the Gift Letter;
•  The Seller must sign the Participating Home Agreement;
• The Gift must be reflected as a credit to the Buyer on the HUD-1 and a debit to the Seller;
• The processing fee must be paid by either the Buyer, Seller, or outside of closing by the Lender;
• And, the loan amount must be equal to or less than the individual county guidelines.

 These programs have been a godsend for many buyers - it will be difficult for purchasers to find the wherewithal for 3% down if they cannot qualify for a conventional mortgage purchase at 100%. Since private mortgage insurers recently revised their guidelines that a FICO score must be 575 or above in order to qualify for a loan above 95% loan to value, FHA will be the only recourse for many first time buyers and those with moderately blemished credit. FHA loans do not require a minimum credit score, so it's essential that if you have any type of credit issues, you first speak with an FHA approved lender.

For more information on Down Payments Assistance Programs or FHA loans, contact us at Metro Mortgage Company. We are a full service FHA/VA approved lender and will be happy to assist you.

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