We get this question a lot, and with the ever-growing popularity and flexibility of FHA first mortgages we thought we’d shed some light on how down payment assistance programs can work with FHA loans. The Federal Housing Administration (FHA) – which is part of HUD – insures the first mortgage, so your lender can offer you a better deal. When using an FHA loan, the required down payment for a purchase transaction is currently 3.5%, an amount many homebuyers may struggle to save for any number of reasons. Down payment assistance programs can offer qualifying participants thousands of additional dollars to help with this down payment requirement, essentially requiring much less out of pocket for the homebuyer to put down on a home.
Many housing finance agencies or local municipalities have assistance programs that can help with closing costs, prepaids and sometimes even rehab work (if you have your eye on a “fixer–upper”). FHA has its own programs and incentives to help with purchasing a foreclosure and with more real estate owned (REO) properties on the market, Realtors and lenders can often help by using homebuyer assistance programs alongside FHA loans.
FHA loans offer some great benefits, especially for first-time homebuyers: lower down payment amounts, more flexible underwriting terms, lower mortgage insurance rates. But you shouldn’t stop your research there. Find out what kinds of additional assistance is available in your area, and start asking your Realtor, lender and housing finance agencies that offer these programs about incorporating down payment assistance into your home financing options. In fact, FHA is one of the most common first mortgages tied to “layering” assistance programs.
Many local assistance programs can be used together with each other or in conjunction with an FHA loan. These additional down payment assistance programs can take a second or even third lien position, meaning the first mortgage (your FHA loan, for example) is the primary lien, and the assistance programs take lower positions with regard to the security interest and repayment of the debt. By layering multiple assistance programs, homebuyers can find more assistance funds, achieve a lower loan-to-value (LTV) ratio on the home at the time of purchase and build long-term equity. However, the lien positions can be a challenging factor in the event that you decide to refinance the mortgage and you can have multiple repayment plans to manage each month, so be sure to engage the experts in your market for their advice and assistance.
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