Down Payment Assistance programs

9 Replies

Hello Bigger Pockets community! I am looking to purchase my second property in the upcoming months. I am curious to see if down payment assistance programs are any good? I have read a few previous posts explaining that sometimes these programs end up resulting in higher interest rates and a 2nd lien of sorts? I am intrigued by the idea but not really sure if they are reliable and worthwhile options? If so are there any specific lenders/institutions or programs any one has experiences with? Any and all information is welcomed. Thanks!

@Tomas Saenz

Not sure about Chicago and Illinois, but we have had a lot of first-time home buyers in Denver and Colorado Springs who have used various down payment assistance programs. The most common one here is the CHFA program that puts you in a 3.5% down payment loan program, gives you that 3.5% for the down payment but then -- as you asked about -- will charge a slightly higher interest rate.

It makes sense. Nothing is free, so they're going to get their money back somehow. But heck, paying 5% instead of 3.5%, while not insignificant, is not a terrible deal if it means the difference between you not buying for two years and buying right now. 

Other than that, at least our moderate-income loan programs are pretty solid. Nothing nefarious going on. Of course, you should do your own due diligence for your area. 

Good luck!

@Tomas Saenz you mention purchasing your 2nd property? That would disqualify you as 1st time home buyer, and you would not be able to use Down Payment Assistance (DPA).

Like the Montes goes, nothing in life is free. You pay for the DPAs in high origination costs (that are subsidized into your loan giving you negative equity stance 104% LTV), and higher interest rate - costing you thousands over just a few years.

Better option is 401k loan or gift funds from relative or close friend. A 60% return on the use of those 401k funds vs. the likely 5% return on your retirement Target Fund is much smarter investment.

For example, $10,000 loan to buy $200k property. Appreciates 3% in first year = $6,000, that’s $6,000 return / on $10,000 loan = 60%

$10,000 x 5% annual mutual fund return = $500

Originally posted by @Harjeet Bhatti :

@Tomas Saenz DPA program is offer on primary home. IHDA is one of the program you can use for primary residence. 5/3rd bank has  their own DPA program for first time home buyer. There are some other local banks who offer different DPA programs for primary home. 

 Harjeet, thanks very much for this. I will keep this in mind.

Originally posted by @James Carlson :

@Tomas Saenz

Not sure about Chicago and Illinois, but we have had a lot of first-time home buyers in Denver and Colorado Springs who have used various down payment assistance programs. The most common one here is the CHFA program that puts you in a 3.5% down payment loan program, gives you that 3.5% for the down payment but then -- as you asked about -- will charge a slightly higher interest rate. 

It makes sense. Nothing is free, so they're going to get their money back somehow. But heck, paying 5% instead of 3.5%, while not insignificant, is not a terrible deal if it means the difference between you not buying for two years and buying right now. 

Other than that, at least our moderate-income loan programs are pretty solid. Nothing nefarious going on. Of course, you should do your own due diligence for your area. 

Good luck!

 James, thanks for that!

Originally posted by @Jesse Hinaman :

@Tomas Saenz you mention purchasing your 2nd property? That would disqualify you as 1st time home buyer, and you would not be able to use Down Payment Assistance (DPA).

Like the Montes goes, nothing in life is free. You pay for the DPAs in high origination costs (that are subsidized into your loan giving you negative equity stance 104% LTV), and higher interest rate - costing you thousands over just a few years.

Better option is 401k loan or gift funds from relative or close friend. A 60% return on the use of those 401k funds vs. the likely 5% return on your retirement Target Fund is much smarter investment.

For example, $10,000 loan to buy $200k property. Appreciates 3% in first year = $6,000, that’s $6,000 return / on $10,000 loan = 60%

$10,000 x 5% annual mutual fund return = $500

Jesse, that is interesting never heard of the 401k Loan, ill have to research this. Thanks

 

@Tomas Saenz

Here are the general considerations regarding 401k loans.

401k Participant Loans

  • If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
  • Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
  • Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).



Please keep in mind the multiple loan rules:

Under those rules, the sum of the balances of a participant's outstanding 401k loans under a single 401k plan (using the highest outstanding balance of each loan over the last 12 months) can't exceed 50% or $50,000 whichever is less. Thus, if you took a $50,000 loan and paid it back within 6 months, you would need to wait another 6 months before you could take another $50,000 loan.