Home Down Payment Grant FAQ

Mory Brenner, Esq.

Q. Are these down payment grants for real? Will a grant assistance agency really give me money to buy a new home?

A. Yes, you can really get money for these non-profit agencies to buy a new home. You need to understand how the assistance programs work and make sure you want to participate.

Q. OK, so give me the details on down payment grant programs. Does my credit or income matter?

A. No, these down payment grants may be issued without regard at all to the potential new home buyer’s income or credit.

Q. Do I have to pay back these down payment grants?

A. You do not have to pay these down payment grants back directly, but we’ll talk more about this later.

Q. Is this for first time home buyers only?

A. No, anyone may use the program for their primary residence.

Q. Can the program only be used for a standard house or may I use one of these down payment grants for a condominium or townhouse too?

A. Down payment grants for condominiums and townhouses are fine. You may not, however, use the down payment grant program for mobile homes on rented land.

Q. Are there 100's of forms to fill out to get the down payment assistance?

A. No, not too much paperwork, only a grant letter.

Q. Is it tough to be accepted to receive a down payment grant?

A. Everyone can be accepted, you have to understand how these down payment programs work to see that everyone can potentially take advantage of a down payment grant. Keep in mind we are only talking about the down payment grant programs here. In order to buy a house you will need a mortgage that will require it’s own qualification process, but programs do exist even for people with no credit or bad credit. You may want to read more about bad credit mortgages or find a bad credit mortgage broker to help.

Q. What process should I follow to get a down payment grant?

A. First you should make sure you thoroughly understand the details of the down payment grant program and other home buying assistance options for people with no down payment or very little for a down payment. If you want to proceed you should next apply and get approved for a mortgage. With a mortgage commitment in hand you may begin to co-ordinate with the down payment grant agency. Next find a home you like and most importantly, a seller willing to participate in the down payment grant program.

Q. Does the government provide these down payment grants?

A. No, this may be the first myth about these down payment grants, the main driver of the programs and funds for the program involves the sellers of the homes.

Q. The sellers put up the money? How does that work?

A. The sellers “donate” the money to the down payment grant agency, the down payment grant agency then makes you a “grant” to buy their house.

Q. Why would a seller want to give money to a down payment grant agency?

A. The incentive for the seller usually comes from one of two reasons or somewhere in between. First the seller may be faced with a situation where you want to buy the house and they want to sell it, but the only way to make the transaction work will be to participate in the down payment grant program. They have no other potential buyers and they agree to provide funds for the down payment grant.

Q. What does it mean for the seller when it happens like that?

A. In essence, they have lowered the price of the house by the amount of the down payment grant.

Q. Is there anything I should worry about if they want to do that?

A. Not really, you have to understand the market you are in. If the seller is just trying to consummate a transaction that might otherwise not take place the down payment grant can provide a helpful tool for everyone. You should always get a good home inspection done in any case, but if for not other reason than extra peace of mind you will want to be sure that the seller extra effort to sell the house does not have roots in a hidden problem with the house.

Q. So if the house is in great shape and the seller wants to participate in the down payment grant program without raising the price is there anything else to keep in mind?

A. In a situation where the seller willingly funds the down payment grant without adjusting the price upward they would be just as likely to give you a price reduction in the house and allow you to buy the home at a discount without the down payment grant.

Q. Well that would be nice if a seller would give me a break on the house to help me buy it, but in my area the sellers control the market. Could I get a seller to participate in a down payment grant here?

A. If a seller does not want to give up a penny of their own money, and especially where house prices race skyward, the seller can raise what they would otherwise accept as a sales price by the amount of the down payment grant and come out with the same amount net to them.

Q. Why does the rising market matter?

A. The only way the whole transaction can work in this way will be when the house can appraise for the higher value, in a rising market it is more likely to get these results. No matter home the transaction started, the house must appraise for a value equal or higher than the contract price.

Q. So the bottom line is that the seller gives you a discount on the house for the down payment grant or they tack the amount of the down payment grant in the form of a higher price on the house?

A. Yes, there could also be some combination where part of the down payment grant takes the form of a discount and part becomes an increase in the home sales price.

Q. What if the seller of the house I want does not understand the concept?

A. Representatives of the down payment assistance agency can help guide them through the process as well as their loan officer and realtor.

Q. What if they just refuse to participate at all, even after they have interacted with the down payment grant agency?

A. If the seller refuses to participate you may find another house or find a way to buy the house you picked out without the down payment grant.

Q. At the end of the day it sounds like a down payment grant can operate like a seller provided second mortgage, what is the difference?

A. For many first mortgages, seller seconds would not be allowed, but down payments grants are OK. Down payment money given by third parties would not be allowed to count as a down payment by the first mortgage company, down payment grants are allowed. A seller discount cannot be counted toward equity or a down payment in the eyes of the new first mortgage, but down payment grants count. Seller seconds often carry higher interest rates than the primary mortgage; grants incorporated into the first mortgage share that lower first mortgage rate.

Q. So where does the bomb come? What do I need to watch for in the down payment grants?

A. I just said it. Be aware that the way the transaction could get put together could mean that you are really paying for the grant in the form of a higher price for the house.

Q. What is the danger of over paying for the home?

A. Paying more than the true value of the home results in a negative equity situation. If you want to sell the house you could find you would actually have to take a loss or come up with cash just to get out of the transaction. That’s if you are lucky enough to have the money to absorb the loss, you might end up losing the house in a way that could destroy your credit.

Q. That sounds unlikely; the values of houses keep going up. In a few months or a few years I’ll have lots of equity, right?

A. In many cases that has turned out to be true, but there are no guarantees that will continue or that it would happen for you. Is that a gamble you are literally willing to bet the house on?

Q. Suppose I’ll take that bet, any other dangers?

A. Added costs could mean that your payments will be higher. For a very few people that represents the difference between affordable payments and a mortgage that pushes you beyond what you can afford potentially resulting in a financial meltdown.

Q. At todayís rates figuring a $100,000 house taking a $10,000 down payment grant and adding it to the mortgage raises the payment by less that $100 per month what is the problem if I can easily pay that.

A. Perhaps nothing, be sure that the payment falls within your budget and that you can withstand unforeseen circumstances like a short term loss of income or emergency expenses like car repairs which cause you to miss a mortgage payment.

Q. Isn’t that just good advice for everyone looking to buy a house?

A. Absolutely, it’s just that the payments go up a bit potentially with the addition of a down payment grant for some people everything still falls well within their budget.

Q. So I understand that I may be paying more for my home and Iím OK with that. I can easily pay a bit more each month. Are there any other reasons not to use a down payment grant?

A. Once you clearly understand the potential risks of a down payment grant program and establish that you are willing to accept those risks you still should review one more option, you may not really need a down payment grant.

Q. I have no down payment myself, how could I buy a home without using one of these down payment grants?

A. Surprisingly you may have more choices than you think. Even without perfect credit you may find you can still get a loan for 100% of the purchase price of the home. Other times you can get 2 loans, one for 80% and another (at a higher rate) for 20%. With either of these options you would not need the down payment grant. In certain communities there may also be government down payment grant programs not dependent on the seller that would not potentially result in a higher sales price for the house. Most of these have income requirements, first time home buyer restrictions, neighborhood limits or all three.

Q. Suppose I have explored the other options and they are not available. I understand exactly how the down payment grant programs work. I know in my case the owner has raised the price of the house and that while I do not pay back the “grant” I will essentially pay back the corresponding increase in the price of the home in the form of an increased mortgage balance caused by paying more for the house in the first place over the life of the mortgage. Furthermore this means my mortgage payments will be more each month to pay the extra principal. I have more than enough income each month for this extra payment. I want to buy a house now, have a home of my own and begin building equity. Even at an increased price I still feel the price is a good and fair value for the home. Why shouldn’t I use the down payment grant.

A. There may be no reason not to participate in a down payment grant program, if you understand the program and how all of the aspects of the potential home purchase will affect your personal finances. This program can help open the door for people to enter their own homes who might be relegated as renters for many years without a down payment grant. 300,000 folks have already used these programs. Make sure you become an educated consumer and research the housing market in your area as well as the options for other grants and mortgage programs. For many people down payment grants can offer just the right fit. If that description sounds like your situation contact a down payment assistance agency and start looking for your new home!

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