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3 Final Down Payment Assistance Myths Debunked

September 25 2013

This is the final installment in a series of articles that debunks common down payment assistance myths. Read the first and second articles here.

dpr final mythsMyths are hard to combat. They can be ingrained over a number of years and deeply held. Sometimes it's only out of necessity and changing times that the truth is embraced.

Consider that the August REALTORS® Confidence Index Survey (released Sept. 23released Sept. 23) weakened slightly due to concerns about the prospect of further increases in interest rates and the continued difficulties in accessing mortgage financing. We believe it's time to look at how down payment assistance can play a part in helping more buyers gain the mortgage financing they need.

Drum roll please...we debunk our final three surprisingly common myths about down payment assistance.

8. Down payment assistance dollars are never forgiven

In any given market, there are a variety of programs, including some that defer payments or interest and others that offer a grant or forgivable loan.

First, it's important to understand how programs work. Nearly every down payment assistance program creates a lien on the financed property, just like the first mortgage. Homebuyer programs take a subordinate second or even third lien position. But not all programs – typically grants – have to be repaid, and those that do will back-load that obligation, waive interest, defer payments, and provide a unique upfront buying power and opportunity for homebuyers.

With deferred loans, payments are often deferred for the life of the loan or grant, with 0% interest, and then the lien is forgiven after a certain number of years – maybe five, maybe seven, maybe 10 or more – if the buyer lives in the property the entire time. Still more programs will defer all payments and interest, or never charge or accrue interest, and use proceeds from a sale or refinance to "pay off" the lien. Even the programs that require the assistance dollars to be paid back upon sale are still providing the buyer an opportunity upfront to get into a home that may not have been affordable or possible otherwise.

Good product training can help lenders, agents and buyers understand the long-term implications of these programs. In fact, this is exactly what homebuyers are learning in the often required homebuyer education course.

9. Sellers won't accept layered financing

Some sellers may at first balk at contracts that include layered financing (beyond a first mortgage). They may fear longer closing times or complicated closings. Sellers have often heard cash offers are better because they're quick and will cost them less.

However, consider that buyers with down payment assistance have an extra cushion to bargain with, allowing them to compete with other buyers on price and seller-paid costs. Extra time may be necessary for the transaction, but if it's known ahead of time, the details can be planned for in advance. It also means the seller doesn't have to take a lower offer to sell faster to a more aggressive (and less common) cash buyer. In fact, down payment assistance may cover items like closing costs and other seller-paid costs, allowing the seller to gain even more. When agents and sellers open their minds to buyers taking advantage of homebuyer programs, it can help all parties involved.

In order to improve the timeline and reduce seller fears, it's crucial for agents to ensure their buyers take the homebuyer education course upfront, complete and submit their loan documents to the lender promptly, and do their part to expedite the process from the beginning.

10. It's advantageous for buyers to put down more of their own money for a bigger down payment.

This myth is largely the result of subprime loans of the past being incorrectly or inadvertently mixed up with down payment assistance programs. Today's programs come with prime loans and required homebuyer education. They provide a leg-up for new buyers who otherwise would be stagnant for years to come. In addition, these programs have been around for years, even decades, but got confused with the now illegal seller-funded "gift" programs and boom market subprime loans.

Sensible down payment assistance programs give the buyer a chance to retain some of their savings for long-term homeownership success and neighborhood revitalization. During the application process, potential buyers learn about the responsibilities and expenses of homeownership, including appliance repair, yard upkeep, heating and air checkups, home budgeting, and more.

With homebuyer programs, buyers don't have to put every last penny towards a down payment, leaving them "house poor." They allow the buyer to move in with a financial cushion in place, some skin the game, and critical homebuyer education under their belt.

In fact, that's why delinquency rates on these loans are actually lower than that of the general market. Studies from the Government Accountability Office (GAO) and Harvard's Joint Center for Housing Studies indicate the delinquency rate on loans using down payment assistance programs is far below subprime delinquency rates, and even lower than market standard FHA delinquencies.

There you have it, folks. Our top 10 myths are revealed! (See myths 1-4 and myths 5-7.)

Which myth challenged your thinking the most? What other myth would you like to see us debunk?

To view the original article, visit the Down Payment Resource blogDown Payment Resource blog.

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