Homebuyer Programs to the Forefront

Wintertime is usually a slow time for the residential real estate market. Cold temperatures and budgets that are recuperating from the holidays make January and February low activity months. The weather in many areas also makes most construction activities a non-starter. During this time of year, seasoned real estate professionals get into prep mode, establishing or maintaining professional relationships, stepping-up marketing efforts and preparing properties for the Spring. Homebuyers can use this time to prepare as well, by getting their financing in order, paying off debts and seeking additional sources of funding. One source of funding that often is overlooked is homebuyer programs and downpayment assistance funds.

Homebuyer programs serve to incentivize homeownership and are typically funded by federal and state funds. The vast majority of these programs target first-time homebuyers. To be clear, a first-time homebuyer is anyone that has not owned a home in three years. Homebuyer programs offer anything from actual money for a downpayment, to reduced mortgage rates, to mortgage forgiveness. Many of these programs combine a number of these features. Homebuyer programs serve many purposes. Some are used to incentivize professionals to move to a certain area. All of them are used to generate more tax revenue, with the understanding that the local area will benefit in multiple ways from increased homeownership and additional investment in the community.

A vast majority of homebuyer programs are funded by HUD--the Federal Department of Housing and Urban Development. HUD typically sends federal funds to states, which are often used on the state level to either support existing housing initiatives or create non-profits to distribute the funding to the public. In addition to the federal funded programs, there are programs that are solely funded through the state budget and there are even a few privately funded programs, as well.

In today’s high interest rate market, homebuyer programs offer increased buying power. These programs frequently offer rates that were considered low during a time of low interest rates and are unattainable today. These rates are typically connected to 30-year fixed mortgages that may never need to be refinanced. Obtaining these lower interest rates can tremendously increase the price point of homes in purchaser's budget and make housing much more affordable. Lower rates, coupled with the mortgage forgiveness aspect of some of these programs bring the potential savings under these programs to astronomical levels. Let’s provide an example:

According to Bankrate.com the mortgage rate for a 30 year fixed rate mortgage on February 18, 2024 is 7.31%, an FHA mortgage has a rate of 6.52%. Please see the table below. This table assumes a 700 FICO score and a standard 20% downpayment, where required.

Product	Interest Rate
30-Year Fixed Rate	7.31%
20-Year Fixed Rate	7.16%
15-Year Fixed Rate	6.61%
10-Year Fixed Rate	6.49%
5-1 ARM	6.15%
10-1 ARM	6.95%
30-Year Fixed Rate FHA	6.52%
30-Year Fixed Rate VA	6.62%
30-Year Fixed Rate Jumbo	7.37%

 

 

 

 

 

 

 *Property of Bankrate.com

Taking loan terms into consideration, one can truly see the savings in final payout when it comes to homebuyer assistance programs. These savings are illustrated in the table below. With all variables remaining the same, the differences in final payout are stark. The four homebuyer programs used in the example below are New York’s SONYMA, HUD’s Good Neighborhood Next Door Program and NACA. The final row applies a 25% discount to the purchase price under the NACA mortgage program. It isn’t unusual for a homebuyer that applies for all of the benefits under NACA to receive a 25% discount. The home value used is based on the median home value in the United States, as calculated by Trading Economics.com. The most aggressive homebuyer program results in a final payout that is almost half of a 30-year fixed conventional mortgage that is paid to term. This is a significant amount of savings. Moreover, the table below shows the dramatic savings that can result from selecting a shorter mortgage term. Selecting a 10 or 15-year term is shown to be more effective than most homebuyer programs, if these other mortgages are paid to term.

Mortgage Type	Home Value	Rate	Term	Final Payout
30-Year Fixed Rate	$382,600.00	7.31%	30	$945,214.19
20-Year Fixed Rate	$382,600.00	7.16%	20	$720,755.96
15-Year Fixed Rate	$382,600.00	6.61%	15	$604,086.58
10-Year Fixed Rate	$382,600.00	6.49%	10	$521,087.90
30-Year Fixed Rate FHA	$382,600.00	6.52%	30	$872,397.65
30-Year Fixed Rate VA	$382,600.00	6.62%	30	$881,483.39
30-Year Fixed Rate Jumbo	$382,600.00	7.37%	30	$950,839.00
SONYMA Achieving the Dream Mortgage Program	$382,600.00	6.00%	30	$825,796.91
GOOD NEIGHBOR NEXT DOOR	$382,600.00	6.52%	30	$479,818.71
NACA	$382,600.00	6.13%	30	$836,898.45
NACA with homebuyer assistance (25% discount)	$286,950.00	6.13%	30	$627,673.84

*Property of the Real Estate Think Tank.com

The impact of these programs is apparent, but the flexibility that they create should also not be overlooked. As cliché as the statement maybe, homeownership is the most frequently used path to generational wealth. The FHA was created just for such a purpose and the United States has a history of incentivizing homeownership through government programs like The Homesteaders Act, The National Housing Act, The G.I. Bill, Section 8, among others. These programs provide discounted access to a life-changing investment for the personal cost of additional paperwork, additional financial transparency, attendance to homebuyer classes and residency requirements of 3-8 years. 

As mentioned above, there are different types of Homebuyer assistance programs. The three largest categories are based on the program's source of funding, which can be federal, state or private. Each of these categories has subtle differences in how they are run and what they can and cannot do with their funding as a result. These differences, however, are negligible to the experience of most home purchasers. Within these larger categories, there are subcategories such as: downpayment assistance programs, low-rate programs and programs with mortgage forgiveness. The difference between each of these categories is explained below:

Federally-Funded Programs: The Department of Housing and Urban Development is the housing arm of the federal government. It receives its budget from Congress for the purpose of furthering housing causes across the nation. Although each administration is going to have different priorities for HUD based on its political ideology, HUD always promotes housing causes, despite the make-up of its leadership. Some of HUD’s funding goes to the states directly for housing, but HUD also funds its own housing initiatives that direct reach the public. For the purposes of this article, federally funded programs will include both the programs that HUD funds directly and the ones that use HUD money that is filtered through by the state. I have put these two groups together, because both are directly beholden to federal housing practices. The USDA mortgage program and the VA mortgage program are two examples of federally funded housing programs. You can find a list of federally funded housing programs by state by clicking here.

State-Funded Programs: In contrast to the broad ideological mission of federally-funded programs, homebuyer programs funded at the state level have a more local focus. They typically serve as a means to revitalize areas where home values are depressed, population has declined, taxes revenues have declined or pride of ownership is low. These programs also serve as a means for the state to dispose of residential properties that have made their way into its possession, as most states do not want to be landlords of individual residential properties for numerous reasons. State programs may empower local municipalities to fund changes in their masterplan and incentivize investment in a new or revitalizing residential area. Community land trust programs, $1 housing programs, state mortgage authority programs, Community Development Corporations and Housing Development Associations are all examples of state-funded programs. Some of these organizations may use federal funds, but many are solely funded by the state. Any search for state-funded homebuying programs begins with the state and local housing/community development associations and can be directed from there.

Privately-Funded Programs:  These programs are funded by local businesses, banks and investors to further housing in a local area. The most well-known example of this type of housing program, the NACA mortgage program, is the result of a settlement entered into by the nation's largest financial institutions after the Great Recession of 2009 to remedy housing abuses that took place during the housing bubble of the 2000’s. Beyond their stated purposes, these programs tend to use both federal and state mortgage underwriting and fund distribution practices. Though these programs are fewer in number, they tend to provide the most generous levels of aid.

Although all downpayment assistance programs can be grouped based on their sources of funding, these programs can also be categorized based on the method of assistance that they provide:

Downpayment Assistance Programs: These programs offer grants that can be applied to the downpayment of a mortgage. Most of these programs have an educational requirement that their participants attend classes on budgeting, home maintenance and the costs of homeownership. Some of these classes even assist the homeowners with saving a downpayment of their own. The assistance offered through these programs can come in many forms:

Grants: One-time downpayment and closing cost assistance that does not have to be paid back. Alaska’s Native American HomeownerInitiative Grant is an example of a downpayment assistance grant.

Loans: Low or no interest second mortgages given by a non-profit that include the downpayment and sometimes closing costs. The downpayment assistance programs provided by the Florida Housing Finance Corporation are an example of this type of downpayment assistance.

Forgivable Loans: Second mortgages given that include the downpayment and closing costs that disappear after a certain period of occupancy is completed by the buyer. Illinois’s IHDAccess Forgivable is an example of a forgivable loan downpayment assistance program.

Tax Credits: These types of downpayment assistance programs provide a tax credit to the purchaser after the housing purchase takes place. When using these types of programs, the buyer purchases the house in a traditional manner and waits until they file their taxes to see the benefit. It is not uncommon for these tax credits to take place over multiple years and require a payback, if a certain occupancy period is not reached. The Time To Own Program by the Connecticut Housing Finance Authority is an example of a tax credit downpayment assistance program.

Both Forbes and the Mortgage Reports offer a state-by-state list of available downpayment assistance programs. The methods of assistance vary significantly from state to state and should be individually investigated. Most downpayment assistance programs are partnered with low-rate mortgage programs to add to effectiveness.

Reduced/Low-Rate Mortgage Programs: These mortgage programs do just what their name implies—provide access to mortgages with below market rates. The federal government funds many low-rate mortgage programs through HUD, the FHA, Fannie Mae and Freddie Mac, but there are number of states with their own mortgage authorities that provide subsidized low-rate mortgages as well. The most famous and readily available example of a federal reduced-rate mortgage program is the FHA mortgage program, which offers low rates to first time homebuyer, but also only requires a 3.5% downpayment. SONYMA is an example of a state-based mortgage authority that offers subsidized mortgages.

Mortgage Forgiveness Programs: Similar to the downpayment assistance version of this program, homebuyers availing themselves of these types of programs will benefit from a portion of their mortgage being forgiven after a certain period of occupancy. One example of such a program is the aforementioned HUD Good Neighborhood Next Door Program, which forgives half the price of the property after a three year occupancy period.

Homebuyer assistance programs are an effective way to lower the barrier to entry into the real estate market. They offer easier access to the tax benefits, wealth and community investment that accompanies homeownership. There is no shortage of these types of programs, as they are present in every state. They are funded federally, on the state level and locally. The assistance offered by these programs has become much more valuable in today’s interest rate market, so please, take advantage.