There are numerous down payment assistance programs around the country and throughout Wisconsin that may well be one of real estate’s secret gems. There are programs for low- to moderate-income buyers as well as buyers with disabilities.
DPA programs
Down payment assistance (DPA) is an umbrella term for programs offered by state housing finance agencies, cities and counties, housing authorities, WHEDA, nonprofit organizations, employers, and others. The assistance amounts may range from a few to tens of thousands of dollars and can be used toward the down payment. Many programs can be used together or “stacked” in combination with other DPA programs to achieve the needed total down payment amount. Additional uses may include closing costs, prepaids, principal reduction or repairs.
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, townhome or a condominium unit purchased as a primary residence, and often must meet minimum housing code standards. For many programs, the buyer need not necessarily be a first-time homebuyer as long as they have not owned a home during the last three years.
DPA programs may be grants that do not have to be paid back or second mortgage loans with varying payback or loan forgiveness provisions.
Grants
Grants are awarded to low-income or moderate-income borrowers, typically defined as earning no more than 80% of the area median income. A buyer might be able to apply for multiple grants, so they should not be shy about trying to find more financial assistance.
Loans
Besides grants, there are a variety of down payment assistance second mortgage loans taken out with the first mortgage used to buy the home. Some loans are forgivable, which means the second mortgage will be forgiven so long as the buyer stays in the home for a certain period of time and stays up to date with their first mortgage payments. With deferred-payment loans, no interest is charged, but they need to be repaid in full when the buyer sells the home or refinances the first mortgage. Low-interest loans are low-interest second mortgages that have to be repaid, usually over the course of a few years.
Income qualification
Several nonprofits specialize in assisting low- to moderate-income homebuyers to secure affordable housing. The U.S. Department of Housing and Urban Development (HUD) defines low- to moderate-income as a household’s annual gross income at or below 80% of county median income. Thus, there are likely moderate-income buyers who may be eligible, but they have not investigated DPA assistance because they assume they make too much money and are not low-income.
The other important thing to remember about income eligibility is that lenders look at an applicant’s earning history while the DPA programs look at the applicant’s present and future income and will evaluate this based on the entire household. This means if the son or grandmother who is part of the household has a part-time job, that income would be included by the DPA provider.
Look to the local lenders
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. They should instead ask local lenders about the qualifications for DPA programs in their area. Prospective buyers should not only shop for favorable mortgage terms but also for lenders who are knowledgeable about DPA programs. Let the lenders be the experts.
Bringing DPA programs to the attention of real estate professionals and homebuyers is the first step. The other piece of the puzzle is finding an acceptable way to document these programs in the offer to purchase.
Addendum DPA — Down Payment Assistance Contingency
That’s where the Affordable Housing Equal Opportunities Committee of the REALTORS® Association of South Central Wisconsin comes in. Together with the WRA, that committee developed a short addendum to use in transactions when one or more DPA program will be asked to contribute funds for the purchase. The Addendum DPA — Down Payment Assistance Contingency form is available in Transactions (zipForm Edition) as well as the WRA’s subscription-based PDF forms library.
Addendum DPA is intended to be used with residential or condominium offers to purchase that are contingent upon the buyer securing approval from one or more DPA programs that are named on line 2 of the addendum. The total amount of DPA assistance needed is stated on line 6.
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 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 ultimately approve or reject the buyer’s loan. The presumption is that the lender’s loan approval is dependent upon the DPA approvals; the down payment must be covered and then the balance of the loan can be evaluated based on underwriting standards. If the DPA is denied, the buyer’s lender will likely deny the loan because there will not be enough down payment.
DPA inspection rights
Many DPA programs adhere to local minimum housing code standards or have specific property condition inspection or testing standards different than the definition of “defects” in an offer to purchase. The Addendum DPA attempts to build upon, or piggyback, the inspection and testing contingencies already in the offer.
With regard to inspections, lines 11-17 of Addendum DPA indicate that the buyer will provide all DPA providers 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 supplied. The deadline for the provision of the inspection reports to the DPA programs is to be stated at line 12. If the DPA program requires additional inspections beyond what is addressed in the inspection reports provided, the DPA provider may engage a qualified third-party inspector to conduct any additional needed inspection.
The DPA inspection will be piggybacked onto the Inspection Contingency, and the parties will treat the DPA inspection as a follow-up inspection under the Inspection Contingency in the offer. “Defects” are defined as stated in the offer but additionally include any property condition deficiencies under the standards of the DPA programs named in the DPA Addendum. Accordingly, if there is an issue with a DPA program property condition standard, 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 and repair the property condition pointed to as a defect.
As stated in the caution on lines 18-21 of Addendum DPA, it is critical to provide ample time in the Inspection Contingency to layer in any needed DPA program inspections. The parties should allow time for the Inspection Contingency in the offer and any DPA inspections done as follow-up inspections, all before the deadline for giving a notice of defects in the offer. Many DPA inspectors will look for health and safety concerns and, for example, may flag lack of smoke and carbon monoxide detectors, windows with no latches or screens, and missing outlet covers. Bathrooms must have a window or a fan for ventilation.
LBP
The parties should also include an Addendum S or other lead-based paint (LBP) addendum or contingency in the offer because the DPA programs likely will require an LBP inspection. Generally, it will be the DPA program inspector who will conduct the LBP inspection, possibly using XRF, so that the parties need not pay for this service.
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 line 22. The testing rights provisions on lines 22-31 grant the right for additional testing to any DPA provider requiring additional testing. Again, providing ample time when setting testing contingency deadlines is necessary if the DPA program testing is to be successfully layered on the testing contingencies already part of the offer.
If a licensee were to draft an offer where $25,000 was needed for the down payment, the buyer applied to DPA programs for the funds and there was no Addendum DPA in the offer, the offer would look like the buyer was bringing $25,000 to the table. When it is discovered that they are not, and they don’t have the funds to close, the buyer may lose their earnest money or worse when the transaction fails. The Addendum DPA protects buyers seeking down payment assistance from liability if their financing does not come together.
Sample transaction
This is a true story from the fall of 2022. The buyer was looking for a home for herself and her two children. They found an older ranch home that was in reasonable condition and was listed for $300,000. She wrote an offer for $300,000 with $3,000 in earnest money. She was able to meet the income limit for a household of three in the county where she was purchasing, which at 80% median income was $80,500, and applied for down payment assistance. The buyer is a person with disabilities, so she was able to apply for $40,000 down payment assistance from Movin’ Out. Those funds are repayable when the home is sold. The buyer also applied for $6,000 in down payment assistance from the Down Payment Plus program, which is a five-year forgivable loan.
The offer included an Addendum DPA that listed Movin’ Out and Down Payment Plus on line 2. The buyer was able to obtain an FHA mortgage, was approved for the DPA programs and thus enjoyed a successful closing. Yes, down payment assistance works!
Use the resources below to search for DPA programs in your area.
Resources