Years ago, my wife Heejin and I drove to San Francisco for dim sum and a housing grant certification program.
The dim sum was awesome, as it always is in San Francisco, but the grant certification went nowhere – and below are a few reasons why.
I should first add that I take no issue with cash-starved buyers looking for all the help they can get, as I too explored grant and down payment assistance programs back when I was a young cash-starved borrower.
But – the problem we see time and again is that sellers very often won’t accept offers involving either grants or down payment assistance.
And – when markets are super-hot like they are now, getting sellers to accept such an offer is all but a pipe dream.
Grants and down payment assistance programs are offered by government entities at all levels (city, county, state, and federal), by banks and lenders and by non-profit entities.
The goal is to either loan or to simply grant cash-starved buyers sufficient funds to cover the down payment, the closing costs, or both.
Here Are 5 Problems With Housing Grant And Down Payment Assistant Programs:
- They signal buyer weakness. Sellers want to ensure that every offer is airtight, as strong as possible and pretty much money in the bank. Grant and assistance programs send exactly the opposite message, making it unlikely that sellers will accept such offers unless they are much higher than all of the others, but that invites appraisal problems as explained below.
- Slower closing periods. Grant and assistance programs always take longer to close simply because there are more hoops to jump through and, on occasion, additional underwrites. 30 days is the best-case scenario for many programs, but 45 days or longer is more like the norm. We were using a down payment assistance program years ago that took so long that both the buyers and sellers threatened to litigate and even contact the CFPB, even though we had zero control over the process. In order to avoid all the hassles, Heejin and I just fronted “the assistance” out of our own pockets (compliantly), and yes, we lost a substantial amount of money doing that loan. But, the buyer did get his home.
- No cash for appraisal shortfalls. This is probably the single biggest issue in this market, as so many offers are over list price and/or over the price of the comparable sales in the area. If an appraisal comes in low for a borrower seeking a grant or assistance program, there is often no cash at all to make up the appraisal shortfall. And sellers are often unwilling to come down in price when they have numerous other buyers in the wings willing to pay full price, irrespective of the appraised value.
- Income limitations. Many if not all grant and assistance programs have strict income limitations that preclude most borrowers from qualifying at all because they make too much money.
- Higher rates. Most of the programs also come with much higher rates, as the extra yield premium or commission from the higher rates is used to offset the cost of the programs.
Lenders of course know all this; Clickbait Much? 😊
All lenders are aware of these limitations. And while there are occasions where grant and assistance programs work beautifully, more often than not, they do not work at all for the reasons set out above.
Lenders often offer the programs though as a way to lure buyers to the table for pre-approvals – with the intent of talking them into a much more viable alternative.
The better alternative is usually just a 3.5% down FHA loan with a large lender credit for closing costs. Because many grant and assistance programs cover down payments but do not cover closing costs, buyers are sometimes better off just getting closing costs covered while still offering sellers a very fast close. We will be offering FHA closings in 14 days again, for example, starting next week.
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