Learning how to qualify for a down payment assistance program in California is a frustrating and confusing experience for most first time home buyers. This article will help you understand what the criteria are and how to qualify for a down payment assistance program.
Most home buyers give up after their first few inquiries and wonder why getting honest and accurate information about the various homebuyer assistance programs is so difficult.
The primary reason for this difficulty is that most loan officers (and real estate agents) don’t understand what programs are available or the basics of how to qualify for the various homeownership programs.
To understand how to qualify for a down payment assistance loan, you have to know what the guidelines and criteria are.
Therefore, I hope this article sheds some light on your quest to learning more about how to buy a home with down payment assistance and keep hope alive that you can buy a home with little to no money.
First Time Home Buyer Status
Do I have to be a First Time Home Buyer to qualify for down payment assistance?
Contrary to what most believe, buyers DO NOT have to a first time home buyer to qualify for a down payment assistance program.
What is a true first time home buyer? Any person who hasn’t owned a home in the last three (3) years.
In fact, not only do many assistance programs NOT have a first time home buyer requirement, many programs allow you to own other real estate and still be eligible.
Even fewer people, including most lenders and Realtors®, fail to realize a buyer can can actually convert their current primary residence into a rental property and still qualify for a down payment assistance program!
Related article of interest: FTHB Pitfalls to Avoid
Income Limits for Down Payment Assistance
All down payment assistance programs have an income limit or cap on how much income an eligible borrower can make and still qualify. Simply put, you cannot make too much money because assistance programs are designed to support home ownership for moderate income wage earners.
Area Median Income (AMI). Depending on the assistance program, income limits can range from 80-100% of the area median income, but it’s common for limits to go up to 110% or even 140% in high cost counties.
Household Size. Income limits are often determined by the number of people living in a household. The max qualifying income will often be lower for a 1 person household compared to a home with 5 people…..but not always. Some programs have one set income cap regardless of the household size.
Household Income vs Loan Applicant Income. Some programs count income from all household members, regardless if they are on the loan while other programs only count the income for the actual applicant. Meaning if the spouse who may not be on the loan application is making $190,000/year, their income won’t stop them from qualifying.
IMPORTANT: Each assistance program has their own unique way, and often several different ways, to calculate and determine what your annual income is for compliance with the programs requirements.
Some assistance provider agencies will review your income documentation themselves to determine this, others leave it up to the mortgage lender to make sure they are calculating it properly.
Sadly, it’s even higher for buyers who are using a down payment assistance program!! Don’t become a sad statistic because your Loan Officer doesn’t know what they are doing and wrongly pre-approve you. You don’t want to waste your time or the real estate agents time and risk being sued by the seller.
It’s critical your loan officer understand every detail about each DPA program provider or agency BEFORE they pre-approve you and allow you to enter into a legal binding purchase contract.
Maximum DTI Ratio
Debt-to-income (DTI) ratio is a measurement of how much income goes towards paying debt, which ultimately determines how much you can qualify for.
Every housing or non-profit agency that provides down payment assistance sets some sort of maximum DTI ratio requirement. The maximum DTI allowed often follows the guidelines our government put in place to ensure every borrower has the ability to repay and can afford the monthly payment.
However, since housing finance agencies are exempted from the Qualified Mortgage and Ability to Repay Gov’t regulations, some DPA providers will allow the max DTI to go much higher while others require an even lower DTI than what is allowed.
This means it’s actually possible for a DPA program to allow you to qualify for more money than you may be able to afford otherwise…..crazy huh?
The most common DTI ratio cap is 45%…but some programs have lower ratio requirements down to 41% and others go up to 50% DTI!
Minimum Credit Score to Qualify for Assistance
99% of the down payment assistance providers require a minimum credit score of 640.
Why? Don’t shoot the messenger, but study after study shows borrowers who demonstrate they’re unable to manage their finances well enough to pay their debts on time (scores below 640) while also unable to save up for a down payment (I know it’s difficult), have a significantly higher default (foreclosure) ratio.
Credit decisions are all about statistical data driven risk….it’s not personal.
However, just because you have a 640+ credit score doesn’t automatically qualify you for a down payment assistance program.
The reason a 640 credit score doesn’t automatically qualify you is DPA in and of themselves are actually classified as a risk factor when your loan is being approved by the government’s automated Desktop Underwriter (DU) or FHA’s Scorecard program.
I’ve seen numerous occasions where a buyer with a credit score between 600-660 receives an Approve/Eligible automated approval when run without a DPA program, but gets declined when a DPA program is inserted into the file as the source of down payment.
If this happens to you, I know what can be done to reverse that declined status and still qualify for the down payment assistance program.
If you are serious about buying and qualifying for a down payment assistance program, I can show you how to boost a credit score by 20-40 points over a 15-90 day period. Just contact me here.
Related article of interest: Understanding Your Credit Score.
Down payment assistance programs are most often paired with FHA loans. However, their are several good programs that also work with Conventional, USDA, and VA home loans.
Does it matter which type of loan you use when buying your home? It sure does.
For example, some assistance programs will require a higher credit score when paired with Conventional financing.
Most assistance programs allow for the purchase of both single family residences (SFR) and condo’s but there are some programs to allow for the purchase of 2-4 unit properties or even manufactured homes with a few additional qualifying restrictions.
There are assistance programs that require the property to have been vacant for at least 90 days or that it be a bank owned/REO foreclosure property. Yet you’ll find other programs that do not allow for the purchase of a bank owned/foreclosed home.
The best way to learn about the specifics of each programs is to click the green Down Payment Assistance Finder button below.
Most assistance programs no longer have geographic restrictions, but depending on the goals of the down payment assistance provider/agency, some programs may require the eligible buyer to purchase with-in a specific city/county or in a targeted area.
A ‘targeted’ area can be:
- Low income census tracts
- High minority census tracts
- City or county limits
- Rural areas ($o down USDA loan)
Some programs even require the borrower work in a certain city/county to be eligible for the assistance program.
All home buyer assistance programs require the property to be a primary residence and owner occupied. You can’t purchase a rental or investment property when using an assistance program.
Common Question: Can I convert my home to a rental after buying with a down payment assistance loan?
This gets tricky….most housing finance agencies/non-profits do not allow a borrower to convert their home into a rental property, but there are exceptions for extenuating circumstances…like if your employer is relocating you more than 50-100 miles away from where you live
My best advice….do not attempt to commit mortgage occupancy fraud. Most DPA providers will follow up with an occupancy check…..meaning they will actually knock on your door to see who is living there.
Trying to defraud a housing agency or lender is not worth the risk unless you are OK with a steep fine and possibly some some jail time.
Maximum Loan Amount
Most down payment assistance providers have a maximum loan amount of $417,000…..that’s the conforming loan limit.
However, if you are pairing your down payment assistance with an FHA loan, FHA may have a much lower loan limit and that would be your maximum loan limit.
Check with your lender on the most recent updated county loan limits.
Sales price Limits
It’s common for a homebuyer assistance program to have a sales price limit that is dependent on the county or even city you are buying in. But there are programs that do not have sales price limits.
Minimum Borrower Contribution
FHA, VA, USDA, Fannie Mae, and Freddie Mac have all removed minimum borrower contribution to secure a loan through them, however, some of the housing agencies who provide assistance still require a borrower contribute 1-5% of their own seasoned funds towards the purchase.
Sounds silly, right? If you had that much in savings, you wouldn’t even want or need assistance? Yes, you may….ask me why.
Home Buyer Education Class
Another common down payment assistance requirement is that buyers complete a certified first time homebuyer education course. These courses are excellent in helping teach prospective homeowners what to expect in the homebuying process, managing their mortgage, and household finances.
Most home buyer education classes cost $50-$15o and are payable to the course provider. Some assistance programs will even reimburse you for that cost.
Before you start signing up and paying for a homebuyer education course, you need to make sure it’s the correct designated provider. Each housing agency or non-profit offering the assistance has different home buyer ed class providers.
Contact me and I can make sure you take the correct class.
Layering Multiple Down Payment Assistance Programs
We often refer to combining or layering multiple assistance programs as the triple layered cake. A multi-layered cake takes longer to prepare, bake, and decorate, right? It’s the same when layering assistance programs.
The most important thing to know when combining homebuyer assistance programs is when two or more qualifying guidelines conflict, the most conservative or restrictive guideline prevails…..yikes!
Layering multiple down payment assistance program can get tricky so make sure your lender fully understands what they are doing….it’s not for the faint of heart.
Who Offers Down Payment Assistance Loans?
Down payment assistance programs are provided by government state housing agencies, local city and county housing finance agencies, and non-profit agencies that promote affordable home ownership.
Your mortgage lender (someone like me) is who you have to contact to apply and qualify for a down payment assistance program.
It’s important for you to know that your lender has to be approved and certified by the non-profit or housing agency to qualify you for the program. If you lender is only approved to offer 1 or 2 DPA programs, you can bet they will not inform you about additional programs you may be eligible for because they risk losing a paycheck.
Homebuyers cannot work with or go directly to the housing agency or non-profit that provides the assistance program to secure your approval for the assistance program.
Get the Facts & Know Your Options
Don’t settle for less. If you care about your finances, you have to make sure you know about ALL your home financing options. This can only be accomplished by working with an experienced mortgage professional who is willing to research and take the time to educate you.
You also need a lender who is certified/approved to provide a majority of the 200+ assistance programs available through out California. Most lenders are not.
Always compare. I always provide a side-by-side comparison for my buyers to consider multiple finance and assistance options when pre-approving them. It’s important to know which program will provide the most benefit for you.
If you’ve found this information helpful and would like more information, you can contact me here or call direct 951-215-6119.