The net number of down payment assistance programs increased during the second quarter, a positive bit of news coming along at a time when even more potential home buyers are facing affordability problems.
But is the target market actually turning to DPA to help fund a home purchase?
Among the three issues affecting DPA use is the competition with cash buyers, as sellers look to take the path of least resistance even when someone has a full mortgage approval, said Tai Christensen, director of government affairs for provider CBC Mortgage Agency. Furthermore, those needing DPA are more likely to have a lower income, making affordability a challenge for them.
Finally, many homes are still selling above listing price. “Keep in mind that the purpose of DPA is to help someone who doesn’t have enough resources available to them to make a down payment,” Christensen said in a statement. “If a DPA borrower has to pay 5% over listing price for a home, they have to come up to the closing table with that extra amount in cash.” And that is difficult if they don’t have “the Bank of Mom and Dad” to help out.
The number of DPA programs available are on the upswing: there was a net increase of 36 DPA programs during the second quarter to 2,273, a gain of 1.6% from the prior three months, Down Payment Resource said.
Back in March, mortgage fintech wemlo, a Remax subsidiary, began offering processing services for DPA, as well as non-qualified mortgage and Federal Housing Administration loans.
“Yes, wemlo has absolutely seen an influx in down payment assistance submissions since we rolled out support for the product,” said Chelsea Balak, vice president of operations in a statement. “Historically, wemlo has primarily processed conventional loans but… we’ve extended our offerings to help our customers better navigate the fluctuating market.”
As a result, wemlo just added low down payment programs Fannie Mae HomeReady and Freddie Mac Home Possible to its processing services.
Nearly 73.5 million homes were purchased or built in the period covered by the Census Bureau’s 2019 American Housing Survey.
While not directly asking about DPA, almost 2.7 million respondents said the major source of their down payment funds were from additional borrowing (not using the property). That represents 6.5% of all transactions that might have used DPA. Meanwhile, 2.1 million used a gift or an inheritance.
The overall reputation of DPA programs was a little sketchy coming out of the Great Recession. HUD’s data found that between October and December of 2007, which was the first fiscal quarter of 2008 for the federal government, because of seller-funded programs, over 22% of Federal Housing Administration-insurance endorsements had some form of DPA. The Housing and Economic Recovery Act passed in 2008 barred the use of seller-funded DPA, because of their high delinquency rates. By the third quarter of fiscal 2009 (April to June), DPA use was down to just 0.2%.
In 2019, the Trump Administration’s Department of Housing and Urban Development looked to further restrict DPA usage, but was forced to back down after it was sued.
In this year’s second fiscal quarter between January and March, just under 25% of FHA endorsements had some form of assistance from a relative. That range has held constant since the start of fiscal year 2013.
The use of government DPA programs — those from a state or local agency — has grown, with over 15% of second quarter endorsements using this source, compared with 7.7% in the first quarter of fiscal 2013.
However, the non-government/non-relative share has remained low. It was at 0.36% in the first quarter of fiscal 2013 before peaking at 2.18 in the second fiscal quarter of 2016. It then slipped under 1% for seven consecutive quarters through the second fiscal quarter of 2021 before returning to 1.16% for this year’s second fiscal quarter.
For conforming loans, the Federal Housing Finance Agency National Survey of Mortgage Originations dataset pulls from a sample of 39,657 loans originated between 2013 and 2019. But only 1,100 or less than 3% indicated the use of assistance or loan from a nonprofit or government agency.
The good news is, DPA users gained an average of $25,000 in equity since their purchase, a 2020 study from CBC Mortgage Agency stated.
Some feel the need for these programs is still growing because of rising rates and prices. By the fourth quarter, it will take 11.3 years for a first-time home buyer earning median income to save enough for a 10% down payment and 22.6 years to be able to put 20% down, a new Standard & Poor’s report estimated. That is over twice the pre-pandemic rates of five and 10.6 years, respectively.
“Lower-income households in the bottom 40% were already pushed out of the market,” Beth Ann Bovino, S&P’s North American chief economist, said in a press release. “By the first-quarter 2022, a middle-income first-time homebuyer was not able to afford monthly mortgage payments, with 60% of households no longer able to afford a home through fourth-quarter 2025.”
Down Payment Resource’s Homeownership Program Index rose by 1.6% on a quarter-to-quarter basis, with a net increase of 36 programs to 2,273. Of that total, 83.5% had funds available for eligible homebuyers as of July 5.
By type, 74% provided some form of down payment and/or closing cost assistance; these could be grants or loans with deferred and/or forgiven payments.
Another 11% were a first lien loan with below market rates, no mortgage insurance requirement or 100% financing. Vouchers and similar programs had an 11% share, while tax credit programs were 5% of the market.
However, 11% of DPA programs are currently inactive, with 3% on a waitlist for funding and 2% temporarily suspended.
“Despite a slight increase in the number of inactive and suspended programs, our analysis indicates that opportunities for homebuyer assistance are continuing to grow,” Rob Chrane, Down Payment Resource CEO said in a press release. “In this especially challenging housing market, program providers are finding creative ways to help qualified homebuyers overcome economic obstacles and achieve the long-term financial benefits of homeownership.”
CBC Mortgage Agency’s Christensen is also positive about the future of DPA, saying “Despite these headwinds for low-income homebuyers, I’m optimistic that market conditions will eventually change and that family earnings in economically disadvantaged communities will increase, offering more opportunities to become homeowners.”