Which down payment assistance programs actually work, and what should buyers avoid?

Hi, this is Jason Skelton with Pacific National Lending.

Welcome to another Q&A session where I answer mortgage questions from you all on the internet.

Today's question is:

"Which down payment assistance programs actually work, and what should buyers avoid?"

Summary:

Jason ranks down payment assistance programs from best to worst. Grants are the strongest option — the buyer receives the down payment and never repays it — but they are rare. His next preference is forgivable programs, where the assistance disappears after a set occupancy period such as five years, structured that way so the funds help genuine first-time buyers rather than someone flipping for quick profit. He is openly critical of programs structured as a second mortgage carrying interest, often around eight percent with no payment due. Those buyers start with negative equity, which he has seen trap people in their homes and make refinancing the first mortgage difficult — a serious problem when rates are expected to fall. His alternative recommendation is gift money from family, which his loans permit.

Answer:

Occasionally we get some that come through as grants, where basically you get the down payment assistance, you put that down payment in, and you never owe it back. Those are the best. They are few and far between, but those have been my favorite to work with. Other than that, my next favorite are the ones that are forgivable after a certain amount of time. So some of them will give you the down payment, and if you live in the home for five years, it disappears. They want to make sure they're not giving you the money so you're going to buy the house, turn around, and sell it for a profit. They want to help true first-time homebuyers realize the American dream. That's why they're there. They're not there to help you make a quick buck. There are other down payment assistance programs out there that I don't care for. A lot of them come as a second mortgage that has an interest rate. So eight percent is kind of a going rate on those. No payment is due, so you can buy it and you can afford the payment on your first, but you're starting off going in the negative on equity in your home. And I've seen it trap a lot of people in the home. The other issue we have with that is because it is going negative, it's hard to refinance that first mortgage. So in a market like today, where the rates are a little bit high and we're anticipating they should be lower in a year, you're not going to be able to refinance to that lower rate. You're going to be stuck and accumulating 8% interest on that money you borrowed for the down payment. I always recommend instead of that type of a program, if you have any other means to get the money — our loans do allow for gift money from family. So if you have a grandmother or somebody in your family that can help you, either with an early inheritance or somehow get you the money so you can do the down payment that way, do the minimum down, start making your payments, and you'll start building equity. It's a much better situation than some of the down payment assistance programs.