Using Down Payment Assistance to Buy Your First 1-4 Unit

Yes, it is possible to use down payment assistance to buy a 1-4 unit property. But like all other things, there are pros and cons to doing it. In this post, I want to discuss the possibilities, and go over the good and the bad, so you can make an informed decision.

Quick Overview

• Needs to be owner occupied.
• Down payment assistance will come in form of either a 2nd mortgage or a grant, depending on the program.
• Some programs will also lend closing costs.
• All programs have a higher interest rate (banks and lenders do nothing for free, lol).
• You can refinance (FHA Streamline) into a much lower interest rate in 12 months, and if a grant, you don't have to pay it back.

I want to reiterate the last bullet point. If you can get approved and make the higher interest rate payment for 12 months, you can refinance out of the DPA and get a much lower interest rate (market rate). This is the beauty of DPA (down payment assistance) programs. They are only temporary, if done correctly.

But like I said, there are pros and cons to this strategy. Let's look at them.

CONS

-Higher interest rate. And sometimes a much higher interest rate. So you will need the income to qualify. But if you can make that payment for 1 year, we can refinance and get it to market rate. And if you buy a 2-4 unit, you can use the income from the other units to help qualify.

-Some programs have income restrictions. But not all of them. In fact, my favorite programs do not.

-In a tight market, may be harder to get your offer accepted. True, but if you work with a loan officer and agent that knows how to make an offer appealing to the seller and listing agent, you can mitigate this.

-DPA dollars are never forgiven. Yes and no. If it's a grant, it will go away when refinancing or selling. If it's a loan, yes, you will have to pay it off when refinancing. Each loan is a little different, you need to know the details.

-You will have little or no equity when using DPA. True. This strategy works best in an appreciating market, so your equity will build quickly.

-Limited to county conforming limits for loan amounts. No Jumbo. 

PROS

-Money for Down Payment and Closing Costs. 

-You can buy now, and enjoy our rising market (appreciation).

-You can refinance in 12 months and get a lower interest rate.

-If a grant, you don't have to pay it back!

Does it Make Financial Sense?

Well, this is a decision that each person needs to make.

Let's look at a quick example. This one uses a grant. I am not including taxes, homeowners insurance and mortgage insurance, to keep it simple and do an apples to apples comparison.

You can see the interest rate is not pretty, and this is just an example. Some are lower, some are higher, depends on how much you borrow.

If you can make this payment, plus taxes, homeowners, and mortgage insurance for one year, let's look at what happens.

Big savings. Of course, we don't know what interest rate will be 12 months from now. This is just an example.

Does it make financial sense?

If your new property appreciates 5% in one year, let's see what happens. 

In 12 months, you have $42,500 in equity (5% appreciation + grant money going away). But you only paid $8,196 extra. Net equity is 34k. 

And if your property appreciates more than 5%, that's more equity.

Was it worth it? 

What If Home Prices Go Down?

I'm in California. Home prices will not be going down (in my opinion, of course). There are just too many buyers, not enough sellers, and not enough homes. It's just supply and demand, I don't think prices will be going down for at least 4-5 years. And that's not just my opinion, all the people smarter than me that I follow say the same thing.

Now it won't be like 2020 and 2021, where prices went up 20% each year. I think it will be in the 5-10% range.

But every area is different. You need to figure this out for yourself. What do you think your area will do?

But I can't predict the future. What if they do go down, and you are 100% LTV (or worse)?

-You can still do a FHA streamline refinance. With this refinance, you don't need an appraisal, so even if your value went down, we can still do it. 

-You may not be able to sell the home (unless you bring money to closing). But if you are trying to house hack, you will want to keep this property anyway.

Real estate values go up and down, we all know this. As long as you have a long-term vision, you will be fine.

Conclusion

Is using down payment assistance a good idea for buying a home today, instead of waiting to save? That's a decision each of us has to make for ourselves. Find a great loan officer that has these programs, get all the information, run the numbers, evaluate your risk level - then decide. This program is not for everyone. But it's good to know your options.

This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without prior notice. All products are subject to credit and property approval. Not all products are available in all states or for all dollar amounts. Other restrictions and limitations apply. Equal Housing Lender.