Clearing the cash-to-close hurdle in a single bound

How you feel about today’s housing market depends a lot on your personal situation. If you own a home, chances are you’re delighted about your property’s soaring value. If you’re looking to buy a home, however, the market can be downright depressing — especially if you live in one of the nation’s high-priced markets. 

In March 2022, the National Association of Realtors reported the median existing-home price was $357,300 — a whopping 15 percent higher than the prior year and the highest price on record. But in a growing number of housing markets, the median home price is more than twice that amount. 

In San Francisco, for example, the median sales price is $1,360,000; in San Jose, California, $983,000; Bethesda, Maryland, $848,000; Los Angeles, $760,000; Boston, $692,000; Seattle, Washington, $751,000. 

Yet while home prices appreciated by double-digit rates over the past year, in 2022 the FHA’s maximum loan limit in the highest-priced markets rose by 18 percent, from $822,375 to $970,800. 

Even in “normal” markets, meeting FHA’s 3.5 percent down payment requirement has become more difficult, but it’s not unreasonable. For the median U.S. existing-home price, a borrower needs a down payment of $12,500. That’s several thousand dollars less than a 2021 Chevrolet Spark, which is currently the cheapest car in the U.S. 

At the FHA’s maximum loan limit, however, borrowers need almost $34,000. That’s no small feat, especially when you factor in the FHA’s 1.75 percent mortgage insurance premium and other closing costs. This hurdle is especially rough on minority borrowers, who typically lack the sort of generational wealth that allows many white borrowers to get into their first home. 

Fortunately, down payment assistance programs can offset the 3.5 percent down payment requirement on FHA loans and help buyers overcome the cash-to-close hurdle. Some programs can provide up to 100 percent financing for FHA-insured loans. Down payment assistance programs have been especially helpful to borrowers who have demonstrated a strong ability to repay. Their only problem is a lack of funds to bring to the closing table.

Unfortunately, these programs are historically underutilized, especially in high-priced markets. Many Realtors and loan officers are unfamiliar with how these programs work. As a result, the majority of low to moderate-income buyers don’t even know these down payment assistance resources exist, or that they are available even in markets with maximum FHA loan limits.

My company, CBC Mortgage Agency, for instance, provides down payment assistance for any size FHA loan, and most state housing authorities and agencies in high-cost areas provide down payment assistance programs as well. 

Many would-be buyers may also not be aware that down payment assistance programs are typically funded using revenue from secondary market trading and are structured as second mortgages. Some programs even include an option in which the second loan is forgiven if the borrower makes timely payments for three straight years. 

There are extra benefits with down payment assistance programs as well. Most programs come with certain protections, including financial literacy courses and strong underwriting controls to ensure new homeowners don’t get in over their heads. This increases their likelihood of becoming sustainable, long-term homeowners.

In the nation’s highest-priced markets, down payment assistance can decrease the amount of money borrowers need to bring to the table by as much as $25,000. This means that as long as they can afford the monthly payments, borrowers can bid on a wider number of potential properties and get their bids accepted — a crucial advantage considering the many housing markets experiencing low inventory. This advantage can be magnified with seller concessions, which can enable first-time buyers to virtually eliminate the cash-to-close hurdle.  

In the past, homesellers were able to help finance a borrower’s FHA down payment. But this option was eliminated by the Housing and Economic Recovery Act of 2008, and for good reason. During the Great Recession, seller-funded down payments accounted for one-third of all FHA defaults. As long as a property appraises for the correct value, however, FHA borrowers can ask for seller concessions toward closing costs for up to 6 percent of the total home price.

For a moment, let’s assume a seller agrees to pay 3 percent in seller concessions and a buyer receives $25,000 in down payment assistance toward an $800,000 home in Hollister, California. In this cash-to-close scenario, the buyer can get as much as $49,000 toward a $785,000 FHA loan. This would cover all of the down payment costs and the upfront FHA mortgage insurance premium of $13,510, allowing them to use their savings on moving costs and furnishings. 

As home prices continue to rise, real estate agents in high-priced markets will run across more and more borrowers struggling to overcome the cash-to-close hurdle. As they try to capture a piece of the American dream, let down payment assistance programs be their bridge to the reality of homeownership.

Tai Christensen is the diversity, equity and inclusion officer and the director of government affairs for CBC Mortgage Agency, a national down payment assistance provider, and has 17 years’ experience in the mortgage industry. Follow her on LinkedIn and Facebook.