Another potential source of funds to augment your limited savings are down payment assistance or DPA programs. The term is a bit of a misnomer because actually the funds can be used for any of your required funds to close.
Assistance programs come in two flavors: those that are grants and those that may require repayment. We're going to look at the grant programs offered by the State of TX first.
- Texas Heroes Home Loan Program
- Home Sweet Home Loan Program
- My First Texas Home Program
The first targets public service workers, such as police, teachers, and veterans. The My First Texas program targets first-time homebuyers, those who haven't owned a home in the last 3 years.
All three programs have income and home price limits. The income limits range from roughly $74k in the San Antonio area to almost $94k in the Austin area. The home price limits also vary by area and average about $300k. Note that in certain areas considered "chronically economically distressed," both limits are higher, and all of the major metros have such areas. You can look up the limits in your area using these links.
The minimum credit score for the programs is 620, and you must complete a homebuyer education course. Other than these requirements, you may qualify with any standard mortgage program.
The grant amount is 3% to 5% of the loan amount depending on the interest rate you choose. The program interest rates are higher than current market rates, which appears to be how the programs are funded, and this could cause the programs eventually to be changed or withdrawn. Freddie Mac recently stated it no longer will accept loans that use "premium-priced" grants, which means grants funded through higher-than-market rates. FHA has been battling internally for more than year over whether it will continue accepting the programs.
But, let's ignore that for now and look at whether the programs make financial sense. Let's use a $250k home with a 3% down payment conventional loan. Your down payment is $7500, and your closing costs and pre-paid expenses are $6600. So, you need a grand total of $14,100 to close.
Let's use a 3% grant from the Home Sweet Texas Home program to cover $7275 of that amount. In exchange for the grant, you accept the program interest rate of 4.875%, which corresponds to a monthly principal and interest payment of $1283.33. As I mentioned before, this is an above-market interest rate. The current market rate for the Fannie Mae HomeReady program is 4%, which corresponds to a monthly payment of $1157.73.
The payment associated with the DPA program is significantly higher, and you first have to consider if can you qualify for the higher payment. You also need to consider if that payment fits your budget. Finally, you should consider whether the payment makes financial sense. You are paying roughly $125 more each month in exchange for a $7275 grant. If you stay in the home more than 5 years, the higher payment makes the grant rather expensive money. However, if it's the only way you can afford a home, it still may be worth it.
The My First Texas Home program has slightly lower rates, so the break even point is a little longer. In addition, all three programs may qualify you for a lower mortgage insurance rate, which would push out the break even point by more than a year.
Finally, some local governments also have DPA programs. Some work this same way,, exchanging grant money for a higher interest rate. Others work as a forgivable second lien. These programs typically provide assistance in exchange for your commitment to stay in the home usually for a term of 5 to 10 years. If you fail to stay the full term, the program has a lien on the property that allows it to recoup some or all of the assitance funds. If you stay the full term, you owe nothing.