Why aren’t more buyers using mortgage assistance?
Mortgage assistance could save one in three mortgage applicants who are denied a home loan. This is according to a new study in June 2022 by Down payment resource.
That’s a surprisingly high proportion of apps. And that suggests that many potential buyers — especially first-time home buyers — still don’t know what help they could get with their down payment and closing costs.
If you are having trouble qualifying for a mortgage or have been turned down once, find out about these assistance programs. If you qualify, this might be just the boost you need to make your home buying plans a reality.
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Why are homebuyers being denied mortgages?
The Down Payment Resource study found that the two most common reasons lenders decline mortgage applications are:
- Too little savings: Borrowers do not have enough cash on hand to cover both the advance payment and closing costs
- Too much existing debt: That of a borrower debt to income ratio (DTI) measures their existing debt plus their new mortgage payment relative to their income. If someone already has a high level of debt, they may not be able to afford a mortgage payment on the home they want.
Both of these problems can be solved, or at least alleviated, with mortgage assistance. In this context, mortgage assistance means things like down payment assistance and mortgage credit certificates (MCCs).
What is down payment assistance?
Down Payment Assistance (DPA) programs exist to help cash-strapped homebuyers find the funds they need to purchase a home. DPA programs provide cash assistance for your down payment and sometimes also for closing costs. Indeed, some might cover all of your initial costs, although these programs are usually designed as an add-on to augment your existing savings.
PADs can be a great help for borrowers who run out of funds at closing. But they can also help you if you have a high DTI. If you can afford a larger down payment than expected, you may need a smaller mortgage. And it lowers the cost of home ownership included in your debt ratio.
Alternatively, a larger down payment may mean you can afford a better, more expensive home. And that may be good news given the pace at which house prices have risen over the past two years.
>Related: Down payment assistance programs in every state
Types of down payment assistance
There are four main types of down payment assistance available to homebuyers:
- Direct grant that never has to be repaid
- “Silent” second mortgage (no monthly payments and 0% interest rate) that is canceled over time
- “Silent” second mortgage (no monthly payments and 0% interest rate) that you must pay off when you sell, move out or refinance the mortgage
- Low-interest repayable second mortgage that you pay monthly alongside your main mortgage
These are usually offered by state and local governments, but may also be available from nonprofits and private mortgage lenders.
A final type of mortgage assistance, called a mortgage credit certificate (MCC), does not provide funds for your down payment or closing costs. But it can reduce your federal tax bill each year by up to $2,000. And it could make home ownership more affordable for buyers with limited cash.
There are over 2,000 DPA programs nationwide, including one or more that should cover where you want to buy a home. Each has its own offers, rules and eligibility criteria. So ask your loan officer for down payment assistance in your area or contact your local housing finance authority for more information on programs that might help you.
Who can benefit from mortgage assistance?
Down payment assistance programs primarily help first-time home buyers. However, in the first quarter of 2022, 38% of these programs had no first-time home buyer requirement, according to research by Down Payment Resource.
Many programs require borrowers to have a low or moderate income relative to the average for their area (referred to as an “area median income” or “AMI”). But each program has its own rules. And they can vary greatly.
If you’re a first responder, teacher, doctor, or in a similar profession, research special programs that might exist specifically for buyers in your field. Read these articles as a good starting point:
To get help from the DPA or MCC, you will need to meet the minimum credit score and income requirements for the home loan program you plan to use. You may also need to complete a home buying training course. And you will probably have to choose a lender from a list of those who participate in the program. Other eligibility criteria may apply, depending on your program.
How to find help buying a house
Your loan officer is a great resource when it comes to finding homebuyer assistance programs in your area. They should know the local DPAs and can help you understand which programs you may be eligible for and how they affect your eligibility.
The mortgage reports also contain information about homeownership programs and grants in each state. Put the name of your state plus “first time home buyer” in the site search bar to find your state’s guide.
Other than that, you can:
Your next steps towards getting mortgage help
If you’re ready to apply for a home loan, ask your loan officer about down payment assistance programs in your area that might help. And if you’ve ever been turned down once, it’s worth learning more about DPAs and how they could improve your chances of getting a home loan.
Contact a mortgage lender to get started.
The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.