So, you’ve decided the time is right to purchase a home. Congratulations!
You’ve evaluated your household budget and savings, looked into mortgage options and even started browsing home listings. Everything seems to be right on track.
Your debt-to-income ratio is ideal and you feel confident monthly payments won’t be a problem.
You’ve thought of everything.
But then, an unexpected life event happens. Your savings that were so carefully set aside for a down payment have been depleted. In an instant, the excitement and financial security you felt about purchasing a home soon dwindles as other financial obligations take precedence over paying anything upfront.
Your monthly financial situation has not changed; you can still afford to pay a mortgage, but your savings account cannot handle any further hits.
Your financial advisor suggests down payment assistance.
What Is Down Payment Assistance?
Like many home buying programs, down payment assistance is a way to help buyers and sellers complete the purchase of a home. The purpose of these particular programs is, as the nomenclature implies, specifically to help buyers overcome the down payment hurdle.
There are various options available, from seller-funded programs to government-assisted loans that can work in tandem with FHA loans.
So, why do down payment assistance programs often have a bad reputation?
During the housing boom, heyday of subprime loans and subsequent mortgage meltdown, loans garnered a wary reputation. While the loans that caused the crisis are not the same as down payment assistance, the housing sector has faced considerable backlash.
That does not mean all down payment assistance programs should be accepted without serious consideration, however.
Down Payment Resource President Rob Chrane advised, “There’s a big difference between these programs and the programs that had tremendous default rates.” Low-down-payment loans and no-down-payment loans have suffered post-mortgage meltdown. Down payment assistance now comes most frequently in three flavors: loans, second mortgages or grants.
“No-questions-asked” loans that were readily available during the housing boom are no longer offered, Chrane said.
Down payment assistance, while often available to anyone interested with the right resources, should not be a go-to solution. Keep in mind that, just like credit card debt, financial assistance can easily be misused when in the wrong hands.
When Should Down Payment Assistance Be Considered Over Delaying Home Buying?
When understood as help as opposed to a handout, down payment assistance can aid in home buying for those who are already financially secure and meet particular criteria, which can vary program to program.
However, qualifying for assistance usually boils down to having a steady, predictable flow of income, healthy credit and minimal savings. Assistance is typically available and approved for individuals who have demonstrated financial responsibility, but are unable to provide substantial payment upfront.
That being said, it’s highly advised that down payment assistance should not be considered when it is the only way to afford a home. Not all programs have stringent criteria that disqualify individuals who are not financially stable; the decision then falls to the discretion of the individuals.
If you are financially secure, but unfortunately have minimal savings, it may be prudent to consider taking advantage of offered down payment assistance.
Above all, don’t go into any financial obligation blind. Do your research. Talk to a financial advisor. Increase your financial literacy.
Don’t fall victim to buyer ignorance.