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The Lowdown on Down Payment Assistance Programs
You did it! You found the house! It’s a 3 bed, 2.5 bath with gorgeous master bedroom, open concept kitchen, shiplap walls, and Spanish tiles in the entryway. It’s like JoJo from Fixer Upper designed it herself. And it was only $100,000! Okay, let’s get real, folks. Buying in Washington, DC often takes a sizable chunk of your change. Even after you’ve scrimped and saved it can be hard to pour every penny you have into the down payment, the closing costs, and the moving fees. In fact, no reputable agent or lender would advise that you do that; that’s where the term “house poor” comes from.
Fortunately, you’re not alone; there are programs out there from the federal government, the DC government, and from private lenders that help cover some or all of these fees. (No, movers won’t be covered – but if you’re moving in from out of state or from abroad, there’s a good chance your employer will help if asked!) Let’s get familiar with these costs:
What’s a Down Payment?
This is the amount of money you “put down” to spend at the start of the purchase that is part of your home loan. It’s typically 3-25% of the total loan; so, on a $400,000 condo, your down payment could be anywhere from $12,000 - $100,000. That’s quite a spread; put that on your bread and butter it! Most people in DC will put down 10-20% but as a buyer, it’s good to know you can put down less.
Lenders prefer you put down more because they think it means you’re less likely to default on your mortgage (that’s industry term for not paying your mortgage and it’s a really bad idea, I wouldn’t suggest it). Your credit score, history, total debt, and annual income all impact the loan amount you can qualify for. See my post last week on how a lender pre-approves your loan.
Down Payment Assistance
DC Open Doors (DCOD)
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You get a grant, and you get a grant! This program provides a grant that covers the cost of your down payment up to 3-3.5% for buyers who might exceed the income cap of other federal programs.
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Friendly income cap. The maximum borrower individual income is $132,360 so chances are many reading this can apply.
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Can’t forget your credit score. Applicants need a credit score of 640 or higher and a maximum debt-to-income ratio of 45%. Your credit score is fully within your control. Talk with Maggie if you need help improving your credit score!
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Sit tight. The loan is forgiven at a rate of 20% a year, meaning you’ll be fully paid off in 5 years. If you need to sell before that time, you’ll owe the remainder of the loan plus interest. So, only consider this loan if you’re planning on sticking around for a while.
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Two flavors. These are backed via an FHA (aka government) loan or a Fannie Mae (aka private) loan.
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A local program. This is offered by the DC Housing Finance Agency.
Down Payment Assistance Programs by Private Lenders
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Competition benefits you. Some lenders provide programs similar to DC Open Doors where they make grants up to 3% of the down payment, but they don’t have to be repaid. You read that right! (Talk to me about reputable lenders that provide these.)
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Timing is everything. Local private lenders are often faster and more responsive during your offer timeline, which keeps a frequently stressful timeline on track.
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Maybe not now, but later. These programs often have less favorable interest rates (the interest you pay on the loan you take out) so you might end up paying more over time, rather than up front, so think about it carefully.
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It’s a re-package. I’ve got it on good authority that many of these programs are either a re-branding of the Fannie Mae loan called HomeReady or something comparable. There’s nothing wrong with that – but you should know!
Home Purchase Assistance Program (HPAP)
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Help when you need it. HPAP gives low-income first-time buyers interest-free loans and help with closing costs to those who qualify.
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You’ve got time. Paying off the loan is deferred (held off) for 5 full years. This means you’ll have time to save money to get the loan paid off.
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Serious assistance. The amount awarded is based on income, the size of your household, and the amount of your down payment. HPAP offers a maximum of $80,000 in assistance and an additional $4,000 or 4% whichever is less in closing costs.
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Not everyone can ride this train. Here’s just a few of the eligibility criteria: be the head of the household and first time home buyer, low-to-moderate income resident, with priority on existing DC residents who may also be elderly, handicapped, disabled, or displaced.
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Get schooled. This program takes a while to get processed and asks for the buyers to take classes and appointments with a loan counselor, so anyone considering this program should consider the time commitment.
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Timing is everything. It can be tough to get the HPAP paperwork done during an offer; buyers should be aware that this loan will often take longer than the terms of a standard contract which may make them less attractive to a seller who wants their house sold quickly.
Also, some versions of these programs require that you take a class or two on home ownership and financing; while that’s time out of your schedule they’re often helpful and free. You can also schedule a meeting with me to discuss what the home buying process will look like! While I’m no teacher, I do wear glasses and have a jacket with patches on the elbows.
Earnest Money Deposit (EMD)
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The EMD should make a cameo appearance on any blog that talks about home costs for a DC buyer. It’s a portion of your down payment that’s used to show the seller that you’ve got skin in the game; you’ll put this amount down when it’s time to make the offer and it’s ratified*. The title company holds that money in escrow as an impartial party until close (the day you actually purchase the home).
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In D.C., you’re likely to put down different amounts depending on where you plan to purchase: the average is 3% but competitive properties in popular neighborhoods can go anywhere from 5-10%.
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Before you start sweating heavily this is part of your total down payment, not in addition to it!
*A ratified offer is when both the buyers and sellers agree to the terms of the offer; it means the seller has chosen to your offer to volunteer as tribute move forward in the process to purchase.
Let’s Not Forget Closing Costs
Buyers have paid at the start of the process with their EMD, secured a loan to pay a mortgage, and are now ready to get the keys to a new home. But, wait! We’re not quite done. All of the other experts in the business haven’t been paid, yet. Your title attorney and lender, having done the lion’s share to ensure your home is really yours and that your finances are in order, are going to get paid here. The DC Government also wants a piece of the action and will ask for a recordation tax. (Yep, so you have to pay to record your purchase. The seller has to pay both the recordation and the transfer tax.)
You’ll also have to pay mortgage insurance, title insurance, and I’m surprised they don’t ask you to insure your lunch for the next day. All this insurance protects you (and them) in case you can’t pay the mortgage or someone says your house is theirs.
Saving Money Through the DC Recordation Tax
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Great news for your wallet! As of October 1, 2017, DC is now asking for a whole lot less money to record your property.
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It’s less than a percent. The benefit is 0.725% tax on eligible homes.
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Lots of homes fit this discount. All residential properties (and co-ops) purchased up to $625,000 can use this new rate.
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Newbies only. Buyers who have never owned an eligible DC property before, or who lost it during a divorce/separation proceeding can apply.
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DC should be your home. Applicant buyers have to prove they live in or intend to make DC their home permanently.
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None of your business. LLC’s, revocable trusts, and other business entities are not eligible for this tax reduction.
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There are income limits. These are all based on the number of dependents; there’s a table in the Homestead Application (Form FP-100) offered by the DC Office of Tax and Revenue.
Saving Money with Title Attorneys and Lenders
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Take your pick. While your real estate agent, if they’re knowledgeable, will have relationships with other leaders who are also great at their job, it doesn’t hurt to shop around. This is your money. Websites like UrbanTurf have done studies on industry rates.
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You get what you pay for. Be careful with lenders and title companies offering fantastic discounts; there’s a reason why they really want to discount their business. Title attorneys and lenders should be proving their value throughout the process. As a matter of professional preference only, going with a mobile lender or attorney doesn’t always go smoothly as a lot can happen at a settlement table—although it’s your option!
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Don’t drag your feet. You might be putting yourself in a very uncomfortable spot if you don’t pick a lender early on in the process. You may even lose the offer because of the timing of the loan. So again, it’s your choice, but definitely make one.
Saving Money on Title Insurance
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Do your research. The American Land Title Association is a great resource for buyers to find title insurance companies in order to compare them. (They’re also a great resource that will dive into closing costs.)
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Ask the seller to pay. I only recommend this on a case by case basis, as in DC this is not particularly common. You have a shot at saving money in DC if the seller has purchased title insurance on a home less than 10 years ago and has a copy of that insurance. Your agent can ask the seller’s agent for a copy of it to get a solid discount on your new insurance.
The list of costs is long when buying a home, there’s no doubt about that. But a savvy agent makes a savvy buyer. Talk with your agent to discuss these options; they may not know every answer but a great agent is always challenging themselves to learn. Don’t have an agent yet? Talk to me – you know I’ve already got your back. Because we all have to get by with a little help from our friends.
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