If a company representative came to your home and offered you $5000 for free, what would you think? I’m sure most would think, “What’s the catch?” There is no such thing as free money. Businesses don’t give away thousands of dollars for no reason.
Oddly enough, people don’t think this way when it comes to down payment assistance programs (DPAs). Maybe it’s the clever wording (“program”) or the outstanding marketing surrounding this money. Either way, people don’t question the free money being offered in a DPA program the same way they would question free money being offered to them in any other situation.
The truth is, there are catches.
1. DPA loans have higher rates, costs, and payments.
A down payment is only one of many important factors associated with a home loan. There is the interest rate, loan closing costs, and payment. As mentioned by the Consumer Finance Protection Bureau, all of these costs are disclosed to you as part of the buying process. But in most cases, they are NOT fully disclosed as part of the advertising. As a result, there is some allure to a DPA program. Because they are not required to disclose all the other factors as part of the advertising, it seems like using these programs is going to cost less. But it doesn’t. Down Payment Assistance loans are more expensive. Most of our customers choose to do a regular “no cost” loan over a DPA loan because the out of pocket costs, interest rate, and payment are almost always higher on DPA loans. Sure, you may get “assistance” on the down payment, but everything else is getting an increase.
2. Not all people qualify.
Many DPA programs require your income to be a certain level. Therefore, if you make more than a specific amount, you will not qualify for these programs. This “free” money is not for everyone.
3. Not all properties qualify.
Most of the DPA money is coming from a government entity or other interested third party. One of the many purposes they have for providing the assistance is to help with an economic issue. One prime example might be a neighborhood revitalization. One way of doing this is getting new buyers into these neighborhoods to help lower vacancy and crime rates. That said, some DPA programs require you to purchase a home in an unsavory location. As a result, it is not likely that your dream home will be purchased with the use of a DPA loan.
You can’t purchase all homes with this free money, and the free money comes at a cost. You end up paying a higher monthly payment and more costs at the time of the purchase.
A mortgage is a long-term commitment. As a result, you need to make sure you’re getting the best home loan possible. A “Down Payment Assistance Loan” might sound good, but it is really what’s best for you?
If you’re interested in comparing a DPA loan to a “No Cost” loan – let us know! Schedule an appointment below with one of our wise Home Loan Advisors.