Why don’t more buyers use mortgage assistance?
Mortgage assistance could rescue one in three mortgage applicants that are denied a home loan. That’s according to a new study in June 2022 by Down Payment Resource.
That is a stunningly high proportion of applications. And it suggests many would-be buyers — especially first-time home buyers — still don’t know about the help they could get with their down payment and closing costs.
If you’re having trouble qualifying for a mortgage or you’ve been denied once, read up on these assistance programs. If you qualify, it might be just the boost you need to put your home buying plans into action.
In this article (Skip to...)
- Why mortgages get denied
- About mortgage assistance
- Types of DPA
- Who is eligible?
- How to find DPAs
- Your next steps
Why do home buyers get denied mortgages?
Down Payment Resource’s study found the two most common reasons why lenders deny mortgage applications are:
- Too little savings: Borrowers don’t have enough money on hand to cover both the down payment and closing costs
- Too much existing debt: A borrower’s debt-to-income ratio (DTI) measures their existing debts plus their new mortgage payment against their income. If someone has a high level of debt already, they might not be able to afford a mortgage payment on the home they want
Both these issues can be solved, or at least alleviated, with mortgage assistance. In this context, mortgage assistance means things like down payment assistance and mortgage credit certificates (MCCs).
What is down payment assistance?
Down payment assistance (DPA) programs exist to help home buyers who are short on cash find the funds they need to purchase a home. DPA programs provide cash assistance toward your down payment and sometimes help with closing costs, too. Indeed, some could cover your entire upfront costs — though these programs are typically meant as a supplement to boost your existing savings.
DPAs can be a huge help for borrowers who are short on funds at closing. But they can also help if you have a high DTI. If you can make a larger down payment than you planned, you should need a smaller mortgage. And that reduces the homeownership cost included in your debt-to-income ratio.
Alternatively, a bigger down payment might mean you can afford a better, more costly home. And that may be welcome news given the pace at which home prices have been rising over the past couple of years.
Types of down payment assistance
There are four main types of down payment assistance available to home buyers:
- Outright grant that never has to be repaid
- “Silent” second mortgage (no monthly payments and a 0% interest rate) that is forgiven over time
- “Silent” second mortgage (no monthly payments and a 0% interest rate) that you must repay when you sell, move out of the home, or refinance the mortgage
- Repayable second mortgage with a low interest rate that you pay monthly in parallel with your main mortgage
These are typically offered by state and local governments but may also be available from nonprofits and private mortgage lenders.
One final kind of mortgage assistance, called a Mortgage Credit Certificate (MCC), does not provide funds for your down payment or closing costs. But it can reduce your federal tax bill each year by up to $2,000. And that could make homeownership more affordable for buyers with limited cash flow.
There are over 2,000 DPA programs nationwide, including one or more that should cover where you want to buy a home. Each has its own offerings, rules, and eligibility criteria. So ask your loan officer about down payment assistance in your area or reach out to your local housing finance authority for more information about programs that might help you.
Who is eligible for mortgage assistance?
Down payment assistance programs mostly help first-time home buyers. However, in the first quarter of 2022, 38% of those programs did not have a first-time home buyer requirement, according to a study by Down Payment Resource.
Many programs require borrowers to have low or moderate income compared to the average for their area (known as the “area median income” or “AMI”). But each program has its own rules. And they can vary considerably.
If you’re a first responder, teacher, doctor, or in a similar profession, look out for special programs that might exist specifically for buyers in your field. Read these articles as a good starting point:
- How to qualify for first-time home buyer programs
- Mortgages for teachers
- Mortgages for doctors
- Mortgages for nurses
- Mortgages for firefighters
To get DPA or MCC help, you’ll need to meet the minimum credit score and income requirements for the home loan program you plan to use. You may also have to complete a home buyer education course. And you’ll likely be required to pick a lender from a list of those participating in the program. Other eligibility criteria may apply, depending on your program.
How to find home buyer assistance
Your loan officer is a great resource when it comes to finding home buyer assistance programs in your area. They should be familiar with local DPAs and can help you understand which programs you might qualify for and how that will impact your eligibility.
The Mortgage Reports also has information on first-time home buyer programs and grants in each state. Put your state name plus “first-time home buyer” in the site search bar to find your state’s guide.
Aside from that, you can:
- Use a search engine to find DPA programs in your area
- Contact your state’s housing finance authority
- Check your state’s page on the HUD website
Your next steps toward getting mortgage assistance
If you’re ready to apply for a home loan, ask your loan officer about down payment assistance programs in your area that might be able to help. And if you’ve already been denied once, it’s worth learning about DPAs and how they might improve your odds of qualifying for a home loan.
Connect with a mortgage lender to get started.