Loan Officer Training 08/29/2024 - How to Structure a Down Payment Assistance Loan

In this episode of the Loan Officer Training podcast, we explore the essential strategies for structuring down payment assistance loans. Discover how to effectively design and manage these loans to help your clients overcome one of the biggest barriers to homeownership.

We’ll cover key aspects such as eligibility criteria, types of down payment assistance programs, and how to integrate these loans with conventional mortgage products. Learn practical tips for ensuring smooth processing, compliance with program guidelines, and maximizing benefits for your clients.

Whether you’re new to down payment assistance or looking to enhance your expertise, this episode provides valuable insights to help you successfully structure these loans and make homeownership accessible to more buyers.

Tune in to elevate your skills and better support your clients in achieving their homeownership dreams!


Tune in and take your mortgage expertise to the next level!

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About The Mortgage Calculator:

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access thousands of mortgage programs using Alternative Income Documentation

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access...

Transcript

Restream recording Aug 29, 2024 • 11:04:01 PM: 0:13

So welcome everyone. My name is Kyle Hiersche. I'm the COO of the Mortgage Calculator joined here by our President Nick Hiersche and our CSO Jose Gonzalez. We are a lender that specializes in non QM loans. And what we do every Tuesday, Wednesday, and Thursday evening at 7 p. m. Eastern on the show is a loan officer training topic. And tonight's topic is going to be how to structure down payment assistance loans. So again, a lot of loan officers wanting to know about this. So it's a very popular request. Jose. I'll go ahead and turn it over to you so we can get to the presentation. All right. Good evening, everybody. for joining us for tonight's training on down payment assistance loans. Now, please know what we're trying to, uh, establish here is the mindset for how to go about structuring your down payment assistance loans. There are multiple options. Some may have slightly different credit scores than what I'm talking about here. But what we're trying to establish here is the difference between the national down payment assistance options, which is, uh, what we offer and the local and state options, which we do not offer because they are much more restrictive. So let's get right into it. How to structure a down payment assistance. So what exactly are we talking about? When we refer to down payment assistance, what programs are we talking? Well, we're talking about programs that assist borrowers with the required down payment and or closing costs associated with their own purchase. I say that because some of the options on these down payment assistance. Programs are for the closing costs only, and some are for the down payment. The main thing to note is that when they are specifically for the down payment, not only do they offer funds to the borrowers to assist, right, but those funds get directly put to the borrower's minimum cash contribution to the deal. So for example, if it's an FHA loan, then you're looking at 3. 5 percent of the sales price of the minimum funds contribution for the borrower. And the down payment assistance loan would meet that requirement. That doesn't mean that it's going to pay for the closing cost too. That's another component, but the borrower doesn't have to come up with the minimum 3. 5 percent out of their own pocket because you know, you could negotiate the seller to pay the closing cost, for example, and have a true cashless transaction. But the main thing to note here is the difference between the locally based option and the national option. Now the locally based option is usually going to be funded by a city, county, or state government. This option requires the MLO and the company, the originating MLO and the company, both be approved to offer that particular program. It also requires the borrower to be approved to participate in the program as well, usually having to be a first time homebuyer and having to meet certain, um, maximum income requirements, right? There is going to be a threshold. Now, these locally based programs can be combined with FHA, USDA, and first time homebuyer conventional loans. Like I mentioned, they're usually going to have maximum. And also, uh, one of the reasons why it makes it difficult for, uh, companies that are a national company to participate in the local programs is because these programs also restrict the compensation that can be charged by the company. And this is a big obstacle because all the compensate all of the comp. Plans that a company has across the board, uh, has to match, right? So you just can't say for one type of loan. Uh, we're going to change it to less than what we make on the other types of loans That would be discriminating Now the national option Which is a one that we participate in does not require the MLO nor the company to be approved by the specific program, only that the company be approved by the investor or lender that is offering. No income limits, no restrictions. Uh, you have both repayable and, uh, forgivable options. Now, one thing to be very aware of on these down payment assistance loans. is that when you are combining, let's say an FHA loan or a USDA loan, which are the ones that we can combine with our national plans, be aware that some of these plans may require borrower paid pricing. They may not offer lender paid pricing. So you have to start looking at the par plus. That's being offered on the rate sheet as your quote unquote, lender paid component, uh, being aware that the pricing is not one where the borrower may actually be, uh, taking a step backwards. And what do I mean by that is if you have a down payment assistance program to give the borrower 3. 5%, down payment assistance, but the program is costing two and a half or 2. 75 points. And that borrower can normally get an FHA loan, uh, at no points for much lower. You really have to see what is the benefit because if they're getting 3. 5%, uh, percent down payment assistance, and they're paying 2. 5 percent to get that down payment assistance, their net benefit is only one at that. And then at that 1%. And then at that point, you're going to have to try to get some assistance from the seller for closing costs and all that kind of stuff. So make sure that the pricing makes sense. Now for the one that we're offering, it does make sense. I was pricing out some stuff recently for down payment assistance in the lower to mid sevens, charging like a 0. 875 or one point. That definitely makes sense. Uh, for a down payment assistance. So we have gotten much improved pricing lately. So what are some of the transaction details then for our national options? Well, again, purchases only can be combined with FHA or USDA loans. For USDA loans it's the forgivable option only because that's just the only one they offer. I mean for USDA it's the forgivable option only. USDA is already 100 percent financing so Typically, there is not any down payment required, so that 3. 5 percent could go towards the closing costs. Eligible borrowers are any borrower that's buying a primary residence, as FHA and USDA is for primary residences. Only no first time home buyer nor income restrictions ever on this national option open to all U. S. citizens, permanent resident aliens, and non permanent resident aliens. And be aware non permanent resident aliens where they need to have a valid work authorization document. Uh, very important, especially, uh, for the FHA loans. It can't just be that they're on an E 2 visa, which gives authorization to work, but doesn't really give a work authorization document. They'd have to go, that would be a non permanent resident alien who would have to then go with a conventional loan, which may not be possible, isn't possible, is not possible, let's say, for the, uh, national DPA option that we offer. Now, eligible properties is pretty interesting because not only are we able to do attached and detached, uh, single family residences, one unit, and PUDs, which are an association, HOA, and a condo, but we can also, uh, originate this product with a two unit property, a duplex, and with a manufactured home. Be aware that there are low level price adjustments when dealing with a two unit property or a manufactured home, but they are possible. And that would be the ultimate house hack. If you get that duplex with DPA. Now, what are some of the details of our national forgivable option? Now, this is really the option, uh, borrowers are looking for when they're looking for, uh, down payment assistance. They want that quote unquote free money. Right. It offers a borrower three and a half percent of the sales price to be used towards the minimum funds contribution. I will note that there is also a five percent. Forgivable option, however, you have to try to get pricing on that 1. it's hard to get compliant pricing on that 1, which is why right now I only have the 3. 5 percent 1 here. The 5 percent 1 would be possible if you had the seller paying closing costs, where then those closing costs, some of that could go directly to pay the low discount fee. For the option so that then it could be used. Best part is that this, uh, forgivable option, the DPA, whether it's forgivable or repayable does go towards the borrower's minimum funds contribution to the deal. Now the forgivable does have a minimum 620 credit score. versus a repayable 660 credit score. Uh, this one can be combined with FHA USDA loans only. Now, very important about the forgivable nature of this loan. No interest accrues and no payment is ever due, right? It is a second lien, right? So it is a second leaning as a property, but again, no, no payment. It is forgivable after five years. If you are current on the first mortgage. So after 60 payments, now this option does have a higher cost. And rate than the repayable option, which would probably be the reason to select the repayable option. Typically, it's like a half a percent to three quarters of a percent in some cases, even a whole full 1 percent lower cost when comparing, I mean, lower rate when comparing the same cost between the forgivable and the repayable, obviously, the forgivable having of the two rates. So some borrowers may not qualify at that higher rate and may have to then go to the forgivable option to get the lower rate, right? Uh, for this, uh, so that they can qualify and still use down payment assistance. Uh, this forgivable option and any of the DPA options can be combined with seller credit for a true no money needed down transaction. So if you get three and a half of the purchase price DPA. Then maybe you get three or four percent of the purchase price contribution and you have a three hundred and fifty four hundred thousand dollar home at three and a half or four percent of that purchase price you're going to get or three or four percent of the purchase price you're probably going to get most of your or all of your closing costs covered and if you have that great realtor that can negotiate that amazing deal for you you would be having a true down or no money needed let's say transaction and again this, uh, The property must remain owner occupied through the sixth payment to be forgiven. And as with all, uh, manual, I mean, as with all, um, automated underwriting files, the DTA maximum is per. AUS. If you do get a refer on your AUS that it does have to go to manual underwrite, then you're going to have to revert to manual underwrite DTI, which is definitely going to be lower than AUS. Now our national repayable option, uh, is also available in, uh, three and a half or five percent. Of the lower of the appraised value purchase prices is always the case. No income nor first time homebuyer restrictions. The assistance is provided in the form of a second mortgage at a 9. 99 percent interest rate, amortization in 30 years, but most important to note a balloon payment due in 10 years. That means that After the 120th payment, which I believe would be 10 years, you got to pay whatever you owe at the time. Now, hopefully the borrower will have refinanced that of the, these two loans into one loan consolidated, got rid of the mortgage insurance, you know, it's going to be a pretty good time now to do all these maneuvers as the rates are dropping, so it's probably not something that you usually would have to worry about that balloon payment due in 10 years, but we definitely have. To put it out there, uh, now again, this does have a lower rate than the forgivable option, but a higher credit score. This can only be combined with FHA loans. It cannot combine the repayable option with USDA loans. And like the forgivable DPA option, the down payment assistance Uh, whether it's three and a half or 5 percent can be used, uh, to meet the borrower's cash requirement of at least 3. 5 percent of the purchase price. Uh, neither of these DPA options are eligible for cash out refi and DTMX again is per AUS. If you have manual underwriting, you have to revert to manual underwriting DTI. Now, our last option here is our repayable closing cost assistance. I want you to pay careful attention to the fact that this is closing cost assistance with up to 6 percent assistance possible. What I mean by it's closing cost assistance means that the money That they're getting can only be applied to the closing costs. The borrower must have 3. 5 percent of their own funds, 3. 5 percent of the purchase price of their own funds to contribute to the deal. Hence the main closing cost assistance and not down payment assistance. It is also offered the same as the repairable option as a second mortgage at a 9. 99 percent fixed rate, 30 year amortization with a balloon due in 10 years. Again, no, there are no income nor first time home buyer restrictions. This is also a lower rate than the repayable option. Excuse me, then the forgivable option, just like the repayable option is lower. It's three, four, five, and 6%. Is the amount of assistance needed and just like the other option DTI max is per AUS. No cash back. This is not for for refinances. This is for purchases only and just like the repayable option minimum 660. credit score. Now, last but not least, I wanted to go over here, uh, and I think that some of my stuff is getting cut off. Darn. Well, I wanted to show you how to properly set this up in the LOS, right? Um, it's very important that, um, if for example, you're using encompass, which is a most popular, uh, LOS that you have the 10 Oh three set up properly. So that the gift or the, you know, which is how the down payment assistance is considered so that it's a, it's a gift from a gov from a government source. Uh, if you want this gift, this gift to be picked up. As an asset, as down payment, it has to be properly set up. Uh, if it's not properly set up in the manner I'm going to explain now, DU findings is going to give you an error stating that you haven't met the minimum three and a half percent funds contribution to the loan. Assuming let's say it was a transaction you were putting together where you had down payment assistance and closing costs. credit from the seller where you have no money coming from the borrower. If you don't have the DPA properly set in the LOS, it's going to think that your borrower is not bringing any money to the table and you're not going to get the approval. So you have to make sure that in page four, section 4D of the application, that you have the gift section checked, that you have the amount of the gift. So we have a gift of cash. The gift is from a federal agency. The gift is for 15, 750. And then when you click show all gifts or grants, it pops up the Fannie Mae additional data screen there. FHA, actually no, it pops up the institution, excuse me, the institution, and right there you have to put PFA, as you see it have in yellow highlight there, PFA, as the name of the institution, that's the required one for the system to pick up, Depository Institution PFA, and then also there's another screen there, which is Fannie Mae Additional Data, right? So that's another form in Encompass. So you have to click the Fannie Mae Additional Data form and then go to the part on gifts and make sure that you put FHA Gift Source Government Assistance, right? So FHA Gift Source Government Assistance in the Fannie Mae Additional Data form and in Section 4D that you select federal agency, put the amount of the gift, right? And then click show all gifts or grants and put in PFA this way as a depository institutions that this way when you run automated underwriting, it'll pick up the gift. as a cash contribution for the borrower, even though it's because it's down payment assistance, not a regular gift. If it was just a regular gift, not a gift of cash from a federal agency and not from PFA, then the system would not give gift amount as down payment. That the bar was making. So real important had a couple of people in the last week come into my zoom support room with exactly this error. And this is what I had to help them with. So that automated underwriting would pick up the gift as down payment. So make sure you have this set up and make sure you understand the differences between the national DPA, the local DPA and pay special, uh, uh, care to the pricing. Make sure that it's not being priced so expensively that the DPA would not make any sense. Now, the options that I've quoted you here today, all will make sense to the borrower, especially now the repairable option is like in the low sevens, almost at par. I think it was like in the low, like 7. 125, charging like a quarter point for a repairable down payment assistance, which is All right. We got a question, but it's about a construction loan. So I think we'll save that for our construction loan video and a printed screenshot of the programs. All the programs are available. Um, if you just look in the knowledge center there, uh, if you're on our team, if you're not on our team, obviously you'd have to lender about the programs that you're referring to. So I don't think any questions about the down payment assistance here. So we can go ahead and. Wrap it up. We will be back next week on Tuesday with another lone officer training.