Helping borrowers to obtain additional funding means they can purchase sooner rather than later — sometimes years sooner. This allows these clients to start building generational wealth through homeownership.

In fact, the numbers show that as borrowers retreat from rising interest rates and home prices, they’re growing increasingly curious about DPA programs. Zillow reported that more than 1 million unique visitors filled out a form on its website in 2022 with income and employment information to learn about DPA eligibility.

The groundswell of interest in DPA may be the advantage you need to originate more home purchase loans during a slow time in the market. By understanding these programs, you can help meet the acute consumer demand for affordable home financing while building referral partnerships with Realtors and housing finance agencies.

Influential originators have reported that content about downpayment assistance is popular, especially on platforms like TikTok and Instagram. So, why aren’t more lenders using this resource to help cash-strapped buyers move forward into homeownership and, as an added benefit, to help narrow the minority homeownership gap? It’s likely that many lenders and the originators who work with them still have misconceptions about these programs.

Demonstrated need

Too many originators assume that DPA programs aren’t available in their market. In fact, all 3,143 U.S. counties have at least one homebuyer assistance program, and more than 2,000 counties have 10 or more programs. Plus, despite challenging economic conditions and market dynamics, more DPA programs have been made available in recent years.

There is clearly a need. One-third of all declined loan applications were rejected for reasons that could have been resolved by applying for homebuyer assistance, according to a Down Payment Resource analysis of federal loan data. Borrowers could have received an estimated average benefit of $17,000, according to the analysis. When that is applied, it increased the cash to close and reduced the loan-to-value ratio by an average of 6%, thereby improving debt-to-income ratios as well.

Some originators believe that their clients won’t qualify for one of these programs. But there are DPA programs for all kinds of buyers. While some programs are specific to first-time buyers (defined as someone who hasn’t owned a home in three years), many of them are open to repeat buyers. In addition, there are also specialty programs for targeted groups such as first-generation buyers, underrepresented groups (including indigenous people), veterans, first responders, educators and more. Plus, some programs make DPA available to buyers of manufactured housing and properties with up to four units.

If you’re worried your borrower will not qualify based on income or home price, many programs adjust these limits in certain markets. In the state of New York, for instance, program benefits range up to $100,000 and can be used by people who earn as much as $162,000 per year to purchase homes priced up to $970,000. The average maximum program benefit is roughly $28,500.

Straightforward requirements

Another worry is that these programs are too complicated and will extend transaction times. These offerings are pretty straightforward once you’re familiar with a program’s requirements — and they shouldn’t extend transaction timelines. Before pursuing a DPA program, read through the requirements and talk to plan administrators so you’re properly explaining them to your borrowers.

Most DPA programs require borrowers to attend homebuyer education courses. These are often held online so they can be completed at the buyer’s convenience. You should proactively inform borrowers and real estate agents of any required coursework so it can be knocked out upfront and doesn’t interfere with funding timelines.

Another concern is that real estate agents don’t want to work with these programs. But today’s purchase market is slow for everyone, which has made agents eager to find affordable financing for their clients. In fact, many real estate agents are looking for lender contacts that can reliably finance home purchases with these programs. This could be a referral-lead generator.

When engaging with an agent new to these programs, you will likely need to point them to educational resources so they understand the scope and how DPA will help them get more people into homes. Like some lenders, they may have misconceptions about how the programs work or who can qualify. Be their trusted partner who helps them tap into this enormously valuable resource.

Another refrain is that home prices are too high for DPA to make a difference. Actually, the opposite is true. Having more money for a downpayment will make a difference in any market. Borrowers can secure a better interest rate and a lower monthly payment, or they might be able to move to a different loan product such as conventional financing. These programs are especially valuable for younger borrowers and those without generational wealth who haven’t had as much time to save. Many of the programs in the U.S. are completely forgivable or offer deferred repayment.

Wealth-building potential

There are hundreds of agencies and nonprofits at the state and local levels that are trying to get DPA programs into the hands of homebuyers. These organizations would jump at the chance to work with you and help more of your clients qualify for loans.

They can also help your clients who are unable to qualify now with a plan to improve their finances so they can be approved for a mortgage in the future. Referrals like this can create a steady revenue stream and open cross-selling opportunities.

There are other benefits to being DPA conversant. Fannie Mae and Freddie Mac have outlined the need to close racial homeownership gaps as a top priority in their Equitable Housing Finance Plans. This is part of their evolving strategy to help buyers of color achieve affordable and sustainable homeownership. Originators who understand these programs help to narrow these gaps.

Loan officers and brokers can better serve the millions of Americans who want to build wealth through homeownership but need financial support and education to make it happen. There’s never been a better time to get started. ●

The post Clear Up the Confusion on These Offerings appeared first on Scotsman Guide.

With thousands of high loan-to-value (LTV) options available, many first-time buyers found other sources to fund their first home purchase. In fact, the share of first-time homebuyers increased during the pandemic, rising to 35% of all buyers in June 2020, higher than the 29% to 32% average since 2012, according to the National Association of Realtors. 

The share of buyers who put down less than 20% reached 77% in June, exceeding the pre-pandemic level. Do the more than 2,000 federal, state, local and nonprofit downpayment-assistance programs that picked up the slack expect increased levels of delinquencies and defaults after originating or guaranteeing loans with downpayments of less than 20%? 

Since the Great Recession, when low- and no-downpayment loans were sold to buyers regardless of their credit, income or debt, the Dodd-Frank Act and other reforms, such as a Federal Housing Administration (FHA) prohibition against seller financing, have lowered delinquency and default rates for loans with LTVs higher than 80%. Since then, studies by leading housing economists have helped explain the levels of risk involved with higher LTVs. These findings have helped lenders design loan products that pose less risk or no additional risk when compared to traditional loans. 

Innovative research

Among the key findings of these studies is that downpayment assistance, including programs from a governmental or community organization, is unrelated to default risk. A 2019 study for the Federal Reserve Bank of St. Louis analyzed a sample of low- and middle-income FHA borrowers, and found that downpayment assistance is not significantly associated with default risk. 

Michael Stegman, an author of the study and a senior research fellow in the Center for Household Financial Stability at the St. Louis Fed, said the analysis looked at various downpayment sources, including downpayment-assistance programs, family and friends, government programs and other secondary financing sources. It uncovered different utilization rates of these sources by race and ethnicity. 

The analysis showed that — when controlling for all other borrower characteristics, as well as lateral and market characteristics — downpayment assistance does not create an incremental default risk beyond that of any other factors. If a significant number of FHA borrowers with government downpayment assistance pose a greater early default risk that those without similar help, it may not be the downpayment assistance that’s causing the elevated risk, Stegman noted.

Counterintuitively, higher downpayments may actually increase defaults by decreasing homeowner liquidity. A June 2019 study from the JPMorgan Chase Institute found that higher downpayments may increase defaults because it decreases homeowner access to cash and thus their ability to withstand financial stress. The study found that borrowers with the post-closing equivalent of less than one month’s mortgage payment defaulted at least five times more often than borrowers with three or four months of post-closing cash, regardless of the homeowner’s equity, income level or payment burden. 

“If the strategy based on maintaining a minimum amount of post-closing liquidity in an emergency mortgage reserve account is impactful and cost-effective, it may be a better approach to default prevention than underwriting standards based on meeting a total DTI (debt-to-income) threshold at origination,” the study concluded.

Low downpayments reduce the time it takes to save for a downpayment. Buying earlier makes a big difference in amassing wealth through housing. A 2018 Urban Institute study found that people who bought their first home between the ages of 25 and 34 build nearly $150,000 in median housing equity by age 61. 

That’s much more than those who waited to buy their first home. The people who bought between ages 35 and 44 had $72,000 less in equity by age 61 than those who bought between 25 and 34. For those who wait until they are 45 or older, the median equity is more than $100,000 less by age 61.

“Today’s young adults are failing to build housing wealth, the largest single source of wealth, at the same rate as previous generations. While people make the choice to own or rent that suits them at a given point, maybe more young adults should take into account the long-term consequences of renting when homeownership is an option,” the study suggested.

Reducing defaults 

Mortgage insurance reduces loan default losses, even on those with LTVs lower than 60%. In a study of Freddie Mac data between 1999 and 2004, Urban Institute researchers found that losses on loans with LTVs above 80% were much lower than for loans with LTVs between 60% and 80%. In fact, the seriousness of losses for these high LTV loans are not too different from (and in many cases, less than) that of sub-60% LTV loans.

The reason is simple. Loans with LTVs above 80% are required to have mortgage insurance, which covers the first loss. This coverage is usually deep enough that the mortgage holder is not exposed unless the market value of the home drops much more than 20%.

Prepurchase homeownership education has been shown to reduce delinquency and default rates among lower-income borrowers using downpayment assistance. From 1990 to 2010, families that participated in Massachusetts’ SoftSecond mortgage program (designed to help first-time homebuyers with lower incomes to finance downpayments) experienced lower delinquency rates than the state’s subprime and prime borrowers during the same period. 

Tennessee’s downpayment-assistance program for first-time homebuyers with low and moderate incomes required participants to receive education on prepurchase and post-purchase topics from an agency certified by the U.S. Department of Housing and Urban Development (HUD). These buyers were much less likely to have experienced foreclosure than a comparison group without the education piece, while the amount of money these households saved by avoiding foreclosure far exceeded the cost of the education.

Mortgage originators can educate consumers about the pros and cons of lower-leverage mortgages so that buyers understand they have options they never considered.

Educating consumers

Likely deterred by the coronavirus pandemic, fewer homeowners have listed their properties for sale this year, with annual declines of 19% or more this past April, May and June. The dramatic decline in new listings is exacerbating an inventory drought that has been raising prices and depleting supplies of affordable starter homes for years. Higher prices increase the cost of downpayments and lengthen the time it takes for a first-time buyer to become a homeowner. That is why first-time buyers made a median downpayment of only 6% last year, according to the National Association of Realtors (NAR).

Lower downpayments are the lifeblood of the first-time buyer business, which is now responsible for one-third of all sales. By learning more about how to mitigate risks associated with lower downpayments and downpayment assistance, the mortgage industry can remove the barriers to homeownership for new generations and underserved minorities.

These times cry out for leadership from policy-makers, including Fannie Mae and Freddie Mac, HUD, FHA, mortgage lenders, Realtors and trade groups. Real estate agents and mortgage originators can educate consumers about the pros and cons of lower-leverage loans so that buyers understand they have options they never considered. Trade associations should promote the role that expanded access to downpayment assistance, coupled with homeownership education, can play in closing the racial homeownership gap.

Lenders should review underwriting policies in light of recent research that suggests first-time buyers with higher downpayments are at greater risk of default than those with lower downpayments and more available cash for emergencies. They might discover they are losing business to competitors and are increasing, not decreasing, their risks of delinquency and default. 

Federal policymakers and members of Congress should understand the unique role that downpayment assistance plays in helping first-time buyers and low- to middle-income families achieve the American dream. Whether the goal is increasing minority homeownership or expanding economic growth by creating more homeowners, downpayment assistance works. ●

The post Balancing Risk appeared first on Scotsman Guide.