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South Bend Home Loan

Monday, March 16, 2015

The Downside of Down Payment Assistance

Potential home buyers often ask me if there is any down payment assistance available through the government.  It's a good question to ask.  Why not take advantage of free money if it's there, right?

The good news is - there IS down payment money available.  The Indiana Housing and Community Development Authority offers the Next Home down payment assistance program to people buying a primary home in Indiana.  This program is great for many reasons, including:

  1. Full down payment given - It covers all of the money needed for the buyer's down payment.
  2. Conventional or FHA - it can be used with both conventional and FHA financing.  
  3. Not for first time buyers only - The program is not just for first time buyers.  Even if the buyer owns a home at the time of application, as long as it will be sold prior to purchasing the new one, they could qualify.
  4. Flexible credit score requirement - to get the down payment help, the buyer's credit score does need to be higher than the minimum FHA requirement, but it's reasonable.  Currently, we require a 660 for Next Home down payment assistance.
  5. No delay in buying - using the program doesn't slow down the home buying process.  We still close in the typical 30-45 days.  
  6. No higher property qualifications - there is no higher property standard set for the house being purchased and no additional inspections needed.
  7. Higher income limits - There is a maximum household income limit for this program so, if you make too much money, you don't qualify.  The limit is generous though.  For a 1-2 person household, the current limit is St. Joseph county is $59,400.  If there are 3 or more people in the household, it's $68,310 (link to all limits for the state here - County Income Limits).

So, this all sounds good, right?  Why wouldn't someone who qualifies take advantage of this?

This IS good, really, but there are downsides to using this program.  The main three are:

Upfront Money Still Needed

Even if you are using the Next Home down payment assistance, you still need money upfront when buying a home.  You need your earnest money when your offer is accepted (typically $500-$1,000).  Within a week after the offer is accepted, you'll need to enroll in the Next Home program (currently $100) and - if you're a first time home buyer - you'll need to take an online home buyer education class (currently $75). The home inspector will also typically want to be paid upfront, if you have one, but you can normally negotiate for this to be paid at closing, potentially from the seller's assistance. The lender will also want to see a months' worth of mortgage payments still in the bank as back-up savings after the items above are covered.

Higher Interest Rate

The interest rate for the Next Home mortgage is typically higher than the interest rate you would get if you paid  the down payment yourself.  The difference varies with rate fluctuations in the market, but on average the Next Home rate is 0.25%-0.50% higher than the normal market interest rate.

But the Big One Is....

These are all minor inconvenience with using this program.  No one wants to gather more paperwork, pay a couple hundred to IHCDA or have a higher interest rate, but to get the free money, it's probably worth it.

There is one piece to this program that may make it NOT worth it, though, if you have another option and that is the higher closing costs.

Let's back up a bit - when you are buying a house, you need money for the down payment, money for closing costs (title work fees, lender fees, appraisal costs, etc.) and money for prepaid items (first year of home insurance, prepaid interest, escrow build-up).  The Next Home program pays for your down payment but it does NOT pay for the closing costs or prepaid items.

So who does? If you have the money and are willing, you do.  If you don't have the money, you ask the seller to pay them on your behalf.  This is allowed as long as the total amount you are asking for doesn't exceed 6% of the price for FHA loans or 3% of the price for conventional loans.

Here's the problem - the closing costs are higher for Next Home loans.  How much higher depends on the price of the home but, in general, if you are asking the seller to pay for those for you, you are going to have to ask the seller to pay for 5-6% of the price worth of fees on your behalf.

This can create problems in multiple ways:

  1. Seller offended - It's fairly common for a buyer to ask for 3-4% from the seller from costs, but when you ask for 6%, the seller may get offended.  They may not be open to your offer because they think you are asking for too much.
  2. Higher price needed - If the seller's are OK with paying the 6%, they're probably going to expect you to pay a higher price on the home to help offset the higher amount they're giving.
  3. Challenge in re-negotiating - If you are paying a higher price for the home because of higher seller concessions, their is an increased risk that the appraisal will come in low.  This is important to know going in because, by the time the appraisal is back, you've spent money on appraisals/inspections/enrollment fees that you can't get back.  If the appraisal comes back low, the seller may be unwilling to drop the price without also reducing how much of your costs they are covering.  This is also a risk with repair negotiations.  If he is giving 6% towards your costs, the seller may be unwilling to give more to fix things that come up on your inspection.

Bottom Line

It's currently a seller's market in northern Indiana.  There are multiple offers happening on good homes so buyers need to go in with the strongest offer they can.  If you are a buyer and you need the down payment help given by Next Home, by all means use it.  It is a good program and will get you into a home now versus having you wait until you save up the down payment.

If you have the ability to cover the down payment yourself, though, consider doing so.  You'll have lower upfront costs, a lower interest rate, will likely pay less for the home and could have a better chance of your offer being accepted because you are asking for lower contributions from the seller.

Bottom line, 'free money' isn't always free, and you don't want to miss out on the home you love because you're trying to get some.  Weigh the pros and cons, talk to you mortgage lender and Realtor and then decide if using Next Home for your purchase is the right step for you.


To learn more about Next Home down payment assistance or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.  

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.
Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.
Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182