Community Seconds and other down payment help

If coming up with the cash for a down payment on a house seems daunting, you’re not alone. About 60 percent of first-time homebuyers (PDF) put down 6 percent or less on their new home, according to Down Payment Resource, an Atlanta based company that aggregates down payment assistance programs. And there are programs that can help you compile that much, but not nearly enough potential buyers appear to be taking advantage.

Drawing Millennial buyers into the market started out sluggish for a generation so large. The primary reasons behind this are high student loan debt, historically high rents and slow wage growth, which prevent potential homebuyers from being able to save for a down payment. Real estate pros say that wider use of down payment assistance programs could supplement recent efforts by the mortgage industry and the federal government to draw more buyers into the market, especially younger buyers struggling to scrape together a down payment.

For more information or to learn how you might qualify for a home purchase loan sooner than you may think, speak with a Licensed Lending Officer at loanDepot today.

You likely don’t need as much as you think

Many potential homebuyers have labored under the assumption that a 20 percent down payment is needed to buy a house. But just 14 percent of first-time homebuyers (PDF) put that much down in 2017, according to Down Payment Resource. But with FHA loans, down payments can be as little as 3.5 percent.

Moreover, in 2014 Fannie Mae and Freddie Mac, the two largest government-backed mortgage buyers, began buying loans that have as little as a 3 percent down payment, down from its earlier minimum limit of 5 percent (95% LTV).

What that means is that because Fannie Mae and Freddie Mac will buy loans with those small down payments from banks, banks will be more confident about lending to buyers with smaller down payments because those mortgage agencies are assuming the risk. This means you could potentially afford a home sooner than you think.

For example, according to Down Payment Resource, in 2014, the estimated median U.S. income for a household was $54,417. It could take more than 12 years to save up for a 20 percent down payment for a home priced at the median value at a typical annual savings rate of 5.6 percent. But with down payment assistance programs, it could take less than two years to save for a 3 percent down payment.

Get help with what need

There are more than 2,000 mostly local down payment assistance programs nationwide that can drastically reduce the amount of money buyers need to pay at closing.

A 2016 analysis from RealtyTrac, an Irvine, California based real estate research firm, found that across 513 counties surveyed in 2016, buyers using available down payment assistance programs could save an average of $17,766 in both down payment costs and interest savings. The total savings breaks down to an average savings of $5,965 on the down payment for a median-priced home, and an average savings of $11,801 on monthly house payments over the life of the loan for a median-priced home, RealtyTrac said.

On average, the amount of down payment assistance in 2016 was $12,434, up from an average of $11,565 in the counties analyzed by Down Payment Resource and RealtyTrac in 2015.

For example, on a $250,000 home with a 3 percent down payment of $7,500, the closing costs for the buyer could typically add up to another $13,000, once costs such as loan origination fees, broker’s commission, title, recording and transfer taxes were factored in. But a down payment program could lower the closing costs to just $200, according to Down Payment Resource and RealtyTrac.

Consider Community Seconds

Down payment assistance programs are offered through a wide-range of organizations, such as cities or counties, local housing finance agencies, nonprofits or even employers. Most are offered in the amount of $10,000, according to Down Payment Resource, and as much as 87 percent of U.S. homes are eligible for some form of financial assistance.

One of the most common programs is known as a Community Seconds and it works by adding a subordinate low interest or no interest loan to the first home loan for the purpose of eliminating or reducing closing costs.

The payment is often deferred or forgiven for each year the buyer remains in the home and sometimes has several emergency relief provisions for the borrower, though the loans can have a higher interest rate than the first trust. Other programs include Mortgage Credit Certificates that can provide up to $2,000 in annual tax credits for the life of the loan.

As you pursue options for helping compile the down payment for your first home, get pre-approved by a loanDepot Licensed Lending Officer so you’re ready to deal when you’ve located your dream home. Call today for more information.

Published Jan. 25, 2018

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