I have been in the mortgage industry for 24 years and working for financial institutions since my Junior year in high school. Banking, auto loans, credit cards, obtaining a mortgage has always been second nature to me. Never questioned anything. I have always had the “RIGHT ANSWERS” at my finger tips.
I have never researched “The Home Buying Process” or “The Mortgage Process” online. I have heard what others have found and I have answered thousands of questions that friends, family and customers have asked as a result of online research.
Down Payment Assistance has been a very hot topic lately. I decided to see what information I could find regarding the topic. What are homebuyers really being told about the topic? This interest came about after speaking to a couple that wanted to take advantage of the lower rates and their increased income to refinance their home to a 15-year mortgage and pay off their home faster.
In the conversation, they had mentioned that they used a Down Payment Assistance program when they purchased their home 2 years ago. Their Mortgage Loan Officer had suggested, even though they had more than enough money to cover the down payment themselves. Their loan officer said, “Why spend your savings when we can get you “FREE MONEY”?
As soon as I heard them say down payment assistance, I know my job to help them get into a 15-year mortgage became much more difficult or impossible. They, like 100’s of others, that I have spoken too are stuck in their loan for 5 years or they have to pay back the money they received for their down payment assistance. In this case, $20,000.00, and not all of it went to down payment.
How is that possible? How did it not all go towards down payment? Is that not what the program is for?
Part of the $20,000.00, $5,000.00, went to cover the excessive closing costs associated with the lender offering the Down Payment Assistance program. I wish I could say that this is an isolated incident, but it is not. This program is used thousand of times a month to help homeowners get into homes.
I want to make sure you understand. I am not against Down Payment Assistance and I am not against helping first time home buyers get into homes. I am against the misleading information and practices that are currently out there. I am for Responsible Mortgage Lending and Home Ownership.
There is a lot of information out there about Down Payment Assistance programs. I do not believe that the information online is intentionally misleading, it is written in a fashion to get your attention and feed on your instant gratification. Highlights or “Bullet Points” to sell you quickly with a big button that say “APPLY TODAY”!
Every site I reviewed had a similar feel.
- FIVE QUESTIONS TO ASK YOUR LOAN OFFICER
- MYTH vs FACTS
- GRAPHS and PIE CHARTS
- BLUES, GREENS, CARTOON HOUSE and THE HAPPY KISSING COUPLE WITH THEIR KEYS
- THE 10 BEST DOWN PAYMENT ASSITANCE PROGRAMS
- AND THE BIG APPLY HERE BUTTOM or SEE IF YOU QUALIFY
Out of the 100 plus questions to ask your Loan Officer about down payment assistance, not even one of the questions was the following:
- “Is the interest rate higher if I use the down payment assistance program instead of my own funds?”
- Why? Because that rate is higher, and they do not want to advertise that the rate could be as much as 3% higher if you use Down Payment Assistance.
- “Do I have to repay the Down Payment Assistance?”
- Why? Because they do not want to explain to you that you could be stuck with that 3% higher rate for the first 5 years of the loan, because if you refinance or sell in the first 5 years you will have to pay all or a portion of the money they gave you back.
- “Does the Down Payment Assistance program place a secondary lien on my property?”
- Why? Because it does! This is how they make sure they keep you in the higher rate loan for the first 5 years.
The point is there is a big difference between “Down Payment Assistance” programs and “Home Buying Housing Grants”!
More home buyers are going to qualify for Down Payment Assistance because the money is not free! It comes with a catch and in many cases, it is an expensive one. Does this mean that you should not use Down Payment Assistance? No, but you need to fully understand what you are getting into.
The couple that I referred to originally did not. Their rate is 1.50% higher than if they had used their own funds. There is a 5-year second lien on their property for $20,000 and only $15,000 of it went to purchase the home. If they refinance or sell in the first 5 years, they owe the entire $20,000 back.
They borrowed $195,000.00 to purchase their home. The 1.50% higher rate is $179 more per month or $10, 740 over the first 5 years. When they called, they were 2 years into the five-year period and we could have lowered their rate by over 2%, saving them $235 per month. That is an additional $8,460 that they will not be able to save, due to the Down Payment Assistance program THEY WERE SOLD!
Yes, I said SOLD!
Why? Remember the additional $5,000 of the $20,000 that did not go towards the down payment? Where did that money go? Simple, additional fees to the lender!
The primary job of a Licensed Mortgage Professional (Mortgage Loan Officer) is to be an advocate for the borrower during the loan process. To educate and help the borrowers understand the loan products available and the pluses and minuses of the programs available. In my case, I take it a step further and advocate Responsible Lending and Home Ownership.
This is why I only support Home Buying Assistance Programs that are Government Grants. Yes, they also will have a higher rate, but they do not have a Second Lien and no repayment is expected if you sell or refinance. Yes, it is true that less buyers qualify for the Grant programs, because they are truly designed for the individuals in the most amount of need.
Down Payment Assistance and HOME Buying Grants are not bad, just understand the entire program before you decide to use one. You only need 3% Down Payment to buy a home. If cut back your frivolous spending for 6 months, you probably can save the down payment!