Episode 3: Are Down Payment Assistance Programs the best programs for First Time Home Buyers?


Eddie Knoell:                      Welcome to the Mortgage Brothers show. I’m Eddie Knoell.

Tom Knoell:                        And I’m Tom Knoell.

Eddie Knoell:                      Welcome everyone. This is our third podcast and today we want to talk about an actual loan program that we think is important to bring up and discuss, right Tom?

Tom Knoell:                        And what is this program for?

Eddie Knoell:                      Well, people call or email us about first time home buyer programs, which we have. And we want to talk about one of the best, we were going to talk about the best first time home buyer program that we have and what we believe is the best first time home buyer program in the country. But people call about down payment assistance programs.

Tom Knoell:                        Also known as DPA.

Eddie Knoell:                      That’s right, they say, “Hey, I’m a first-time home buyer and I want to put zero down, what kind of programs do you have?” Now that’s the question, right, we get.

Tom Knoell:                        Mm-hmm (affirmative).

Eddie Knoell:                      So the answer is, we don’t have down payment assistance programs. And there’s a reason … Well, I’ll tell you about this. The down payment assistance programs, I want everybody who’s listening just to be really careful when they do down payment assistance programs, because there’s all sorts of marketing, and I would say scheming, that goes on with the banks. They want agents to sell homes. They want buyers to go out there and buy houses to generate mortgage deals and actually make money. The problem is, if volume’s down, these banks will promote these programs with zero down.

Tom Knoell:                        Mm-hmm (affirmative).

Eddie Knoell:                      Anyway, they call them down payment assistance programs and they have high interest rates. A lot of them have high interest rates and a lot of them have high costs.

Tom Knoell:                        So can I just tell the audience why they have high interest rate?

Eddie Knoell:                      Sure.

Tom Knoell:                        Because when I get calls and people ask me, “What are we considering in terms of the first time home buyer programs?” I say, “There’s really going to be two options for you.” We can do one of them, which is the best in classed alternative, which’ll give you the lowest interest rate. The other alternative is this DPA. You have to look at it from this way. Look at it from the standpoint of after your loan gets done, who’s purchasing these loans? Investors are purchasing them. I say, “Okay, now put yourself in the seat of the investor. If you yourself were the investor, and you had two loans to purchase, you had one loan that was a conventional Mortgage Brothers Team type best in class first time home buyer loan, or if you had a down payment assistance loan, which one would you pay more for? Or what would you pay for them?”

Well they say, “Well, we’d probably pay less for the down payment assistance program, because we know the borrower didn’t have as much money in there. The risk was higher.” I said, “Exactly.”

So in order for those investors to get the same type of yield on those two different loans, they have to charge more money. So hopefully that kind of makes sense. But these, literally, put yourself in the shoes of the investor. When you go to buy these loans, of course the one with assistance will not be worth as much. Therefore, in order to make it up to the investor, the investor would have to pay less or charge you more interest, so that they pay the exact same amount as for the other one.

Eddie Knoell:                      Yeah.

Tom Knoell:                        So hopefully that kind of makes sense?

Eddie Knoell:                      That’s right. I think it is hard to articulate to the audience, but that, you get what you pay for, especially with these programs. If you’re getting a zero down, down payment assistance program, 90% chance that you are overpaying on your interest rate, maybe 1 to 1-1/2% higher interest rates and the closing costs are higher. They might have to have the seller kick in a contribution.

Now, there are grant programs that are available. We don’t, you and I, we don’t deal with grant programs that the city or county’s offering. You have to have a certain income, you have to buy in certain neighborhoods in some cases. There’s certain things you have to qualify for. So we’re not experts in all programs, but the programs that we see, come across our table that our customers are saying, “Hey, this is a program that was being offered to us, what do you think of it? It’s zero down.” It’s usually crap.

Tom Knoell:                        Mm-hmm (affirmative). We did work on a grant program about two months ago. I don’t know if you recall, but it was in the City of Phoenix. And after working about three weeks on it, the City of Phoenix ended up contacting the borrower/buyer and saying, “Sorry, we decided to take another application.”

Eddie Knoell:                      Right.

Tom Knoell:                        So the borrower was very frustrated, ended up finding another home a week later and they came up with their 3% down. Actually they bought a manufactured home. So we are able to do those grant programs, but they’re very few and far between and there’s usually catches on them. There’s limitations.

Eddie Knoell:                      Yes, that’s right. And I’m going to do a small demonstration just to show how expensive this can be. If someone wants to do a down payment assistance program and compare it to the program that we’re going to recommend … Actually, we have to talk about that. What program are we offering our borrowers in lieu of these down payment assistance? We’re offering them a 3% down conventional loan with great rates. Now, as of this recording, it’s March 13th, you can get a 3% down, conventional loan for a first time home buyer with about 4.25% on the interest rate. That’s with a credit score of like a 680. Now, I’m going to also say that, that’s an APR of about 4.6% and that’s because of the … There is mortgage insurance in the program.

That’s better, that actual rate itself, is better than a conventional loan with 20% down with an 800 credit score. So this program’s a really good program. Again, it’s a conventional program. It is 3% down. Now, if someone’s still wondering, “Well, I don’t know if I have 3%, or maybe I still should go for a down payment assistance program, those DPAs,” I’ll explain it to them like this: If my interest rate’s 4-1/4 today, those down payment assistance programs are probably 5-1/4 to 5-1/2. What’s going to happen, and that’s on the whole loan, so just …

Let’s just take a sales price of $200,000. If they don’t have 3% down, that’s $6,000 for the down payment that they have to come up with or save or receive as a gift, right? If they don’t have the ability to do that, if they go the down payment assistance route, they’re going to be paying approximately $2,500 more in interest on their payments, per year.

Tom Knoell:                        Currently-

Eddie Knoell:                      Their payments are going to be $2,500 more a year.

Tom Knoell:                        So someone that’s coming to us looking for help is actually going to be having to pay more, more per year. So how does that work, right, on the down payment assistance programs? So someone coming to you looking for assistance, they’re actually having to pay an additional, what did you say, $2,500 a year?

Eddie Knoell:                      If someone’s looking for a down payment assistance program, their … What I’ll explain to them is that their payments are probably going to be about $2,500 more a year, that’s like $213 a month more, just because of the higher interest rate they’re going to be paying on a down payment assistance program.

Tom Knoell:                        Which doesn’t sound very sustainable to me. Why would someone do that?

Eddie Knoell:                      Well, because they need to get in the house. They believe they have to get in that house right now.

Tom Knoell:                        Right, but I guess the whole point is, is that they shouldn’t. They come to you needing money, because they don’t have it, and instead of going with the best in class loan that we could provide, they go for a down payment assistance program, which allows them to potentially have no money down, but they’re paying an extra $2,500 a year?

Eddie Knoell:                      Yes, $2,500 more a year, because they did not have $6,000 for a down payment. If you do the math, it’s about 42%. It’s like paying 42% interest on the money for the down payment that you didn’t have. That’s why it’s so important to look at your resources as a borrower, and think, “Okay, can I get a gift? Can I save at least part of the money? Is there anybody in the family I can go to?”

Tom Knoell:                        So just a couple things. Yeah. And before I jump into how we get to the 3%, so I just multiplied $2,500 per year by seven years, because that seems to be the average time a person stays in a home. That’s over $17,000, $17,000 for a person coming to us for a first time home buyer program. We would never offer that. So real money. And then in terms of the 3% down, when I get calls, I tell people I break the 3% up into three different components: a 1% from you, 1% maybe from a 401k that you forgot about, there’s lots of employers, and these employees, there’s first time home buyers that have been working for a couple of years that didn’t even know that they had a 401k, and then 1% from a relative.

Eddie Knoell:                      Yeah.

Tom Knoell:                        So 1% from yourself, 1% from a 401k you forgot about and 1% from a relative. You’re in a best-in-class loan, no extra premium associated to it.

Eddie Knoell:                      That’s right, and you know, a lot of us have employers that are flexible with us as employees. Gifts from employers are also eligible.

Tom Knoell:                        Oh, that’s right, good point.

Eddie Knoell:                      Go to your boss. Ask for a bonus. If you’ve been doing a great job, I mean, this is a perfect time. You’re buying a house. Ask him for a bonus, something like that. It can be a gift or bonus, but anything like that. This is a-

Tom Knoell:                        Are there income limits to this program?

Eddie Knoell:                      Yes. That’s right. So let’s just talk about what the requirements are. In Maricopa County, there’s a whole website that breaks down areas that have income limits. Some areas don’t have income limits. So the income limit is the Maricopa County median income, which is $69,100. So if you make more than $69,100, you won’t be eligible for … and that’s per year. If you make more than that, you won’t be eligible for the program unless you buy in these certain areas in the city.

Tom Knoell:                        Which are usually on the perimeters, right?

Eddie Knoell:                      Yeah. Well, that’s right. They are going to be in areas that are scattered throughout the whole city. I mean, everywhere from Mesa, Gilbert, Chandler, Phoenix, North Phoenix. So they’re all throughout and they’re even in Central Phoenix, so it’s-

Tom Knoell:                        I did not realize that. I thought they were all peripheral.

Eddie Knoell:                      No, they’re based on the census tracks done in 2010. So the census that was done, they calculate these areas and it’s … So it’s not even per zip code. And we can help them find the map. We’ll help them, we’ll guide them through the map. There’s an online link that we’ll give them. So again, if your income’s over $69,100, you wouldn’t be eligible for the program, unless you buy in these certain, designated areas. But there is a, also, an online course that needs to be taken and just tells … It really teaches home ownership responsibility, responsible home ownership, you know, what does it mean.

Tom Knoell:                        I think it costs about $75 and is about a two to three hour course.

Eddie Knoell:                      Yeah, and they just-

Tom Knoell:                        If I’m not mistaken.

Eddie Knoell:                      Yeah, they just self-pace online to do it.

Tom Knoell:                        Yeah.

Eddie Knoell:                      Anyway, it’s a great program. Interest rates, like I would say, are better than … Someone with a 680 credit score with 3% down on this program’s going to have a better interest rate than someone with an 800 credit score with 20% down. So it’s pretty amazing.

Tom Knoell:                        That is. And you’re actually right about that?

Eddie Knoell:                      Yeah, just priced it out today. Well right now, we have very good pricing on this program. So again, this is a conventional loan program and we have auto … We get automated approvals on it, so it’s-

Tom Knoell:                        We don’t want to be making our 800 credit score borrowers angry right now.

Eddie Knoell:                      No, no. Again, these are for borrowers with little down. This program is to help borrowers with little down, okay? If you have an 800 credit score, 20% down, even though your interest rate might be a little higher, you’re not going to have mortgage insurance. So it is still better to go with 20% down, if you have it.

Tom Knoell:                        Right.

Eddie Knoell:                      Right?

Tom Knoell:                        Mm-hmm (affirmative).

Eddie Knoell:                      This program’s not just to do because it has a lower rate. It does have mortgage insurance. But the mortgage insurance is very competitive and very good, if you have to have it.

Tom Knoell:                        Okay. So should we just summarize here, real quick?

Eddie Knoell:                      Sure.

Tom Knoell:                        Okay, so when you get a call or you, yourself, are looking for a first time home buyer program, you need to be thinking of two different programs if you come to work with the Mortgage Brothers Team.

One is the home ready product, which is 3% down. That’ll give you a discounted interest rate and it’ll get you a discounted mortgage insurance payment.

If you don’t have as good a credit, then you would go towards the FHA program, which is 3-1/2% down, which is a phenomenal program. There is an upfront mortgage insurance premium associated to it, which helps keep that mortgage, that monthly mortgage insurance payment low, per month.