There are hundreds if not thousands of down payment assistance programs (DPA) around the country that may well be some of real estate’s secret gems. There are programs for low to moderate income buyers as well as buyers with disabilities. These DPA programs offer real estate professionals with an excellent opportunity to assist first-time homebuyer prospects who have concerns or challenges making their down payments. Many more households would probably take advantage of these programs if only they knew about them.
DPA programs may be offered by state housing finance agencies, cities and counties, housing authorities, WHEDA, the Veteran’s Administration, non-profit organizations, employers and many others. To be sure, each program is unique with distinct eligibility requirements, home-price limits, and resale restrictions. DPA programs have household income standards, homebuyer education requirements, and specify the type of property that may be purchased using DPA funding. The property usually must be a house, town home or a condominium unit purchased as a primary residence.
DPA programs are normally second or third mortgages or grants, with zero percent interest rates, deferred payments and/or forgivable loans. The assistance amounts may range from a few dollars to tens of thousands of dollars and can be used toward the down payment. Additional uses allowed may include closing costs, prepaids, principal reductions and/or repairs.
Many people think they could never buy a home because they don’t have the down payment, so they don’t ever shop for a house even though they may be able to afford monthly mortgage payments. The key is for them to look into the qualifications for DPA programs in their area.
The momentum DPA program
The best way to appreciate the opportunities awaiting homebuyers is to review an example. Movin’ Out, Inc. provides a range of housing solutions to adults with disabilities and to families that include children with disabilities. Movin’ Out conducts homebuyer education classes about credit, money management, DPA, mortgage lending, real estate, home inspection, home insurance, closing documents and procedures. Movin’ Out also offers programs with no disability requirement such as the Momentum Program for first-time homebuyers.
The Momentum Program provides eligible first-time homebuyers with up to $8,500 as a zero interest, deferred payment loan. The $8,500 may be used for the down payment and/or closing costs such as the appraisal, credit report, title insurance and other settlement fees.
The gross household income of qualified buyers may not exceed 80 percent of the county median income adjusted for household size as determined by U.S. Department of Housing and Urban Development guidelines. Borrowers must pay at least one percent of the purchase price from their own funds toward the down payment. Face-to-face homebuyer education from Movin’ Out is required.
Eligible property may include single family homes, condominium units and some duplexes, and must be located in Dane County outside of the city of Madison. The purchase price may not exceed $233,000. A HUD Housing Quality Standards inspection must be conducted by a Dane County inspector in addition to any other inspection performed under the offer to purchase.
The loan is deferred until such time borrower sells the property, stops occupying the property as a primary residence, or initiates a cash-out refinance. See the additional information at www.movin-out.org/2016/Momentum2016.pdf.
Bringing DPA programs like Momentum to the attention of real estate professionals and homebuyers is the first step. Finding an informed, amenable lender is also important. The other piece of the puzzle is finding an acceptable way to document these programs in the offer to purchase.
That’s where the Affordable Housing Equal Opportunities Committee of the REALTORS® Association of South Central Wisconsin comes in. This committee focuses on homeownership for minorities and persons with disabilities through education, community outreach and fundraising, increasing affordable housing opportunities, and providing tools such as information on nonprofit organizations that assist homebuyers with down payments, closing costs and more. They have developed a short addendum to use in transactions when one or more DPA program will be asked to contribute funds for the purchase.
Addendum DPA – down payment assistance contingency
The Addendum DPA – Down Payment Assistance Contingency is intended to be used with offers to purchase that are contingent upon the buyer securing approval from one or more DPA programs or sources, which may be named on the second line of the addendum. The total amount of DPA needed is also stated.
Buyer’s DPA approvals
The buyer agrees to promptly apply to the named DPA programs. If the buyer is approved, the DPA provider will deliver written approval to the buyer’s lender. This is a different from most contingencies that real estate practitioners are accustomed to working with. In this instance, the DPA provider notifies the lender, and the lender will then either approve or reject the buyer’s loan. The presumption is that the lender’s approval is dependent upon the DPA approvals; the down payment must be covered before the balance of the loan can be evaluated based on underwriting standards.
DPA inspection rights
Many DPA programs have specific property condition inspection and/or testing standards that may go beyond the definition of “defects” in an offer to purchase Inspection Contingency or beyond the standards in various testing contingencies. Because the criteria and requirements of many DPA programs are often in flux and may change frequently, the Addendum DPA attempts to build upon or piggyback on the inspection and testing contingencies already in the offer.
With regard to inspections, the Addendum DPA indicates that the buyer will provide all DPA programs that require a property inspection a copy of all inspection reports created in fulfillment of the Inspection Contingency in the offer as well as any other offer provisions that cause inspection reports to be generated. The deadline for the provision of the inspection reports is to be stated in the blank line. If the DPA program requires additional inspection beyond what is addressed in the inspection reports provided, the DPA provider may engage a qualified third party inspector to conduct the additional needed inspection and treat it as a follow-up inspection under the Inspection Contingency in the offer. “Defects” would be defined as stated in the offer but also additionally include any deficiencies relating to the property condition requirements of the DPA programs named in the DPA Addendum. Accordingly, if the follow-up inspection reveals an issue with a DPA program property condition requirement, the buyer will have the opportunity to deliver a notice of defects to the seller based on the expanded definition of defects. The seller, in turn, may then decide whether to cure or repair the property condition pointed to as a defect.
The caution stated in this provision is of critical importance if the DPA program inspection requirements are going to be successfully blended into the Inspection Contingency in the offer:
“Buyer should provide sufficient time in the Inspection Contingency and/or other provisions to accommodate this multiple stage inspection process, provide the right to cure for the seller, and include contingencies or addenda in this offer authorizing a lead-based paint assessment and/or testing for other substances DPA providers will require.”
In order for the Addendum DPA to function properly, there needs to be ample time allowed in the Inspection Contingency so that the DPA programs may conduct any follow-up inspections needed to fulfill the DPA program requirements. It also alerts the buyer that there should be testing contingencies included in the offer for lead-based paint and any other substances that a DPA program will want testing done for.
DPA testing rights
Similar to the provision for DPA program inspections, the buyer will give a copy of any testing reports to the DPA providers by the deadline indicated on the blank line. Although testing contingencies typically do not provide a ready-made opportunity for follow-up testing, the testing rights provisions in the addendum grant the right for additional testing to any DPA provider requiring additional testing. The DPA provider may engage a qualified independent expert to conduct additional testing as long as that testing is completed by the deadline in the relevant testing contingency in the offer. The results of the additional testing will be evaluated under the parameters set forth in the related testing contingency as well as the standards of the DPA programs named in Addendum DPA.
Again, as the caution reminds, providing ample time when setting testing contingency deadlines is necessary if the DPA program testing is to be successfully layered on to the testing contingencies already part of the offer.
Many of these programs also tend to change over time as market conditions, funding availability and other factors change. Be sure to check with local lenders to see what DPA programs they are aware of and work with. And be sure to check back often because the programs tend to change frequently.
Addendum DPA — Down Payment Assistance contingency is available in zipForm.
Resources
Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.