Jonathan W. Spurr, Inspired Life Mortgage (NMLS #304969)
I have been in the mortgage industry for 32 years and working for financial institutions since my junior year in high school. Banking, auto loans, credit cards, and obtaining a mortgage have always been second nature to me. I never questioned anything. I always had the “right answers” at my fingertips.
I have never researched “The Home Buying Process” or “The Mortgage Process” online. I have heard what others have found, and I have answered thousands of questions from friends, family, and customers who have come to me after their own online research.
Lately, down payment assistance has been a hot topic. I decided to look into what information is available online and what homebuyers are actually being told. My curiosity was sparked after speaking with a couple who wanted to refinance their home into a 15-year mortgage to take advantage of lower rates and their increased income.
During our conversation, they mentioned using a down payment assistance program when they purchased their home two years ago. Their mortgage loan officer had suggested it, even though they had more than enough savings to cover the down payment themselves. The loan officer told them, “Why spend your savings when we can get you free money?”
As soon as they mentioned down payment assistance, I knew that helping them move to a 15-year mortgage would be much more difficult, if not impossible. Like hundreds of others I have spoken to, they were stuck in their loan for three to five years unless they paid back the assistance they received—$20,000 in this case. Not all of it even went toward the down payment.
How is that possible? Isn’t that what the program is for?
Of the $20,000 they received, $5,000 was used to cover excessive closing costs associated with the lender offering the down payment assistance program. Unfortunately, this is not an isolated incident. This program is used thousands of times a month to help people buy homes.
To be clear, I am not against down payment assistance or helping first-time homebuyers. I am against the misleading information and practices that currently exist. I believe in responsible mortgage lending and homeownership.
There is a lot of information online about down payment assistance programs. While I don’t think this information is intentionally misleading, it is often presented in a way that grabs your attention and feeds into the desire for instant gratification. Websites use catchy headlines, bullet points, and big “Apply Today” buttons to get you to act quickly.
Every site I reviewed had a similar structure:
- “Five Questions to Ask Your Loan Officer”
- “Myth vs. Facts”
- Graphs and Pie Charts
- Blues and Greens, Cartoon Houses, and Happy Couples with Their Keys
- “The 10 Best Down Payment Assistance Programs”
- Big “Apply Here” or “See If You Qualify” Buttons
Out of over 100 questions suggested for borrowers to ask their loan officer about down payment assistance, not one included the following:
- “Is the interest rate higher if I use a down payment assistance program instead of my own funds?” (Yes, it often is—sometimes by as much as 3%.)
- “Do I have to repay the down payment assistance?” (Yes, many programs require repayment if you sell or refinance within the first five years.)
- “Does the down payment assistance program place a secondary lien on my property?” (Yes, and this ensures that you stay locked into the higher-rate loan for at least five years.)
The truth is, there is a big difference between “Down Payment Assistance” programs and “Home Buying Grants.” More buyers qualify for down payment assistance because the money isn’t free—it comes with a catch, often an expensive one.
Does this mean you shouldn’t use down payment assistance? Not necessarily, but you need to fully understand what you are signing up for.
The couple I spoke with did not. Their mortgage rate was 1.5% higher than it would have been had they used their own funds. They also had a five-year second lien on their property for $20,000, of which only $15,000 actually went toward purchasing the home. If they refinance or sell within the first five years, they must repay the full $20,000.
They originally borrowed $195,000 to purchase their home. The 1.5% higher rate increased their monthly payment by $179, costing them an additional $10,740 over five years. By the time they called me, they were two years into that period, and I could have lowered their rate by over 2%, saving them $235 per month—an additional $8,460 in savings they will now miss out on due to the down payment assistance program they were sold.
Yes, I said sold.
Why? Remember that extra $5,000 of the $20,000 that didn’t go toward the down payment? Where did that money go? Straight into additional fees for the lender.
The primary job of a licensed mortgage professional is to advocate for the borrower, educate them on loan products, and help them understand the pros and cons of each program. I take this a step further by advocating for responsible lending and homeownership.
This is why I only support home buying assistance programs that are government grants. Yes, they also come with a higher rate, but they do not include a second lien, and repayment is not required if you sell or refinance. Fewer buyers qualify for these programs because they are designed for those in true financial need.
Down payment assistance and home buying grants are not inherently bad—but you must understand the full picture before committing. You only need 3% down to buy a home. If you cut back on frivolous spending for six months, you can likely save that amount yourself.