With housing affordability at an all-time low, many would-be homebuyers are struggling to participate in today’s market. The monthly mortgage payment on a single-family home with a 30-year, fixed-rate mortgage and a 20 percent down payment rose 54% year over year, and today’s borrowers rarely put 20 percent down to help reduce their monthly expenses. In fact, the National Association of Realtors found the average down payment amount for first-time homebuyers in 2021 was only 7 percent, with repeat buyers putting down 17 percent.
Given the compounding effects of interest rates, affordability concerns and lack of available inventory, offering the traditional array of loan products may not be enough to help borrowers. Adding a down payment assistance (DPA) program to your product lineup may be a valuable tool to help your customers overcome the challenges of today’s market and shift their mindset when it comes to having an adequate down payment to qualify.
Let’s start with the basics:
DPA is a loan or grant eligible borrowers can use toward the down payment on a home purchase.
While state housing finance agencies are the most well-known DPA program sources, these programs are available at nearly every level of government — including local — and through various nonprofits. In addition, several wholesale and correspondent lenders offer proprietary DPA products to approved partners.
Research from the St. Louis Fed found no significant correlation between DPA and default risk. In fact, the positive impact of DPA in providing affordable lending options, especially for low- to moderate-income (LMI) and/or minority homebuyers, is so significant that the report notes, “In setting guidelines around downpayment assistance, policymakers should take care not to close off opportunities to aspiring minority homebuyers.”
The biggest borrower benefit DPA provides is increased purchasing power. For example, based on current market estimates a hypothetical borrower in Texas with a 700-719 credit score that wants to purchase a house for $300,000 could lower their interest rate by as much as 16 basis points just by increasing their down payment amount from 3 percent ($9,000) to 5 percent ($15,000) using a DPA grant. This potentially shaves nearly $200 from that borrower’s monthly mortgage payment. Alternatively, this borrower could increase their home buying budget by as much as $25,000 while keeping roughly the same monthly payment. For borrowers close to saving a 20 percent down payment, utilizing DPA to hit that watermark eliminates the need for private mortgage insurance (PMI), which further reduces a borrower’s monthly payment.
From the community bank perspective, improving a consumer’s home buying power is certainly a powerful benefit, but that’s not all DPA can do for banks. Depending on the location of the home and the borrower’s demographics, DPA loans can help banks fulfill their Community Reinvestment Act (CRA) requirements and provide tangible evidence of support for fair lending.
This answer depends on the program. While DPA programs have traditionally been aimed at serving LMI and/or first-time homebuyers, many programs today have no restrictions on income or buying status. Recent increases in conforming loan limits also expand the applicability of DPA; many borrowers can now qualify for DPA at a higher purchase price than previously allowed.
While it may not solve every challenge today’s mortgage market presents, adding a DPA program to your product mix could help open the doors to homeownership for customers that may otherwise struggle to provide a meaningful down payment on the home of their dreams. Consider your local market and borrowers’ needs to help determine if a DPA program may make sense for your product lineup.
*Promontory MortgagePath does not endorse any product described within the context of this article. This discussion is for informational purposes only.
