Update on the Down Payment Assistance Loan
After disappearing for about a decade, down payment assistance programs are beginning to resurface as loan programs which help borrowers with the minimum down payment required to purchase a home. These programs are designed to help borrowers with some or all of the down payment and/or closing costs associated with buying a home. The programs are generally offered by a local or state housing administrator. They can also be administered through a nonprofit organization or directly through a lender.
Down payment assistance programs are loan programs that help borrowers with the minimum 3.5% minimum down payment required for loans generally recognized as low down payment loans.
Minimum Qualifications for the Down Payment Assistance Program
If you want to qualify for a down payment assistance program, you have many options to choose from. Be aware that these programs have strict guidelines that you are required to adhere to in order to be qualified to receive help through the program.
Information about your credit score, credit history, and income is gathered as part of the determination of whether or not you are credit-worthy, in other words, qualified to receive a loan under the program guidelines.
There are not many rules for qualifying for the down payment assistance program, but the rules for qualifying are strict.
1. You need to be able to prove your income with full documentation. You need to have W2’s, paystubs and tax returns. Sadly, for the down payment assistance programs, the lender cannot qualify your income based on stated income and bank statements.
2. Outstanding credit issues would need to be resolved or addressed because any money you owe to creditors will count against your income.
Credit scores are what lenders use to help determine whether or not you are credit-worthy. According to The Lenders Network, your credit score is a deciding factor in beginning the qualification process in order to obtain a loan through the Down Payment Assistance Program.
For typical loans, the following example is the usual expectation for credit scores.
Credit Score and Down Payment Schedule
With a Credit Score of
The borrower can get a loan with a minimum down payment of
The county in which you live determines the minimum credit score required for the loan.
Right now, I am working with buyers who want to purchase a home in Stanislaus County, California. Stanislaus County requires borrowers to have a minimum credit score of 640 before they can be qualified to participate in the down payment assistance program.
If you are seeking to qualify for a loan through the down payment assistance loan program, you must factor in the minimum credit score required to qualify for the program. If your county's minimum credit score number is unreasonably high, and if you can save enough money for the minimum down payment required to get a loan, you may want to consider going directly to a lender to qualify for your loan. Most home lenders require you to have a minimum credit score of 620. A score of 620 may be lower than your county's minimum credit score requirement. In this case, you have a better chance of getting a loan if you go directly to a lender for the loan.
Understand this very important concept regarding your credit score - the higher your credit score, the less the lender may require for your down payment. A low credit score means you will have to put at least 10% to 20% down, depending on the loan you are seeking.
In addition to looking at the credit score, the lender looks at the credit history to determine how likely you will be in paying back a new loan. The manner in which you pay back previous and current creditors is used as a gauge to determine the timeliness and thoroughness in handling credit that has already been given to you.
If you pay your debts on time and pay the amount agreed upon between you and the creditor, then you are looked upon more favorably than a borrower who is always late to pay and/or who does not pay at all.
If you have a good credit score and a good credit history, the lender will then look at how much income you make and how much current debt you have. The lender also looks at how much additional debt you will incur if they were to award you the additional loan.
Your new debt will be computed and matched against your income to determine what is called your debt-to-income ratio. Typically, lenders want your debt-to-income ratio to be less than or equal to 43%.
Debt to income ratio is calculated by taking the monthly debt payment and dividing it by the gross monthly income (income before taxes and deductions are taken out).
For example, if your monthly debt is $2,150 and your monthly income is $5,000, then your debt-to-income ratio would be 43%.
$2,150 / $5,000 = 43%
Let’s look at another example to help you grasp the concept. If your monthly debt is $1,500 and your monthly income is $5,000, then your debt-to-income would be 30%.
$1,500 / $5,000 = $30%
The higher your debt-to-income ratio, the higher the risk the lender takes to issue you a loan.
The Down Payment Assistance Program Is Back
Between the years 2003 to 2006, 100% loans were prevalent. But soon afterwards, there was fallout from the enormous number of loans that went into default and as a consequence, lenders ceased offering 100% financing for home loans.
Now, with the recovering economy and more insight on how to qualify borrowers, the loan industry has brought back 100% financing and the down payment assistance program. At the same time, the industry is making it more difficult to qualify for these loans. Nevertheless, if you meet the minimum qualifications stated in the guidelines, you are likely to receive a down payment assistance loan without a lot of hassles.
If your credit score is not yet up to the minimum credit score required for a down payment assistance program and if you are not able to qualify for a loan at this time, the best thing to do is to work with your creditors to get your accounts settled.
You can talk to a financial advisor or a lender to help you determine which debts and how much of the debt is required to be reduced or paid off entirely. If your creditor is willing to consider a lower payment, your financial adviser or lender can give you some useable tips and strategies for negotiating lower payment obligations.
The other thing to do is to continue putting away funds for the down payment and closing costs. In some cases, your real estate agent can negotiate with the seller to help with some or all of the closing costs. But, the more important issue is the down payment. Most lenders want you to have some "skin" in the game. In other words, they want you to have something to lose if the lender gives you a loan. Although 100% financing is beginning to resurface, it seems to be much more difficult to get these types of loans. In order to qualify for 100% financing, credit scores are required to be extremely high and income documentation is stricter than in the past.
Nevertheless, there are many loan programs that are available. You do not have to be stuck with the strict ones. There are loans out there for everyone. The first step is to talk to a lender to see what your credit score is and work with any creditors with whom you have a negative history.
Last, but not least, start saving funds for the down payment and closing costs in case you are not able to qualify for the down payment assistant program.
Down Payment Assistance Resource
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2019 Marlene Bertrand