Only recently have I realized how bad of a job the mortgage industry has done to educate consumers and borrowers about down payment options, product offerings, and qualifying strategies. The media and watchdog agencies advertises to the public the importance of “shopping for the lowest rate” and “go with the lowest fees” or “make your decision on a lender based on price alone”. Very few times do we hear mortgage lenders actually advertising new loan programs and products that hit the market every year. How can you possibly know which loan offers the best rate, fees, and terms if you’re not even sure what you’re looking for?
Recently, I met with a first time home buyer. I invited him into my office to discuss strategy, and he had dozens of questions about loan products and how some of these loan programs worked. Initially, he was interested in a HomePossible loan, then the conversation moved towards renovation lending options, and eventually we landed on how to make his first deal happen with a down payment assistance loan. Of course, the gentleman I had met with was familiar with down payment assistance, he didn’t exactly know how beneficial down payment assistance could be to help him acquire his first property.
After we ran through the numbers, and I showed him a recent transaction that had closed where the buyer purchased their first home with only $1,000 cash out of pocket, his ears perked up and he said “That’s what I want to do”. Before we had discussed this scenario, he had no idea that purchasing a home with literally $1,000 was even a possibility. In fact, before we reviewed this strategy, he was going to put off the idea of purchasing a home for another 6 – 12 months. With the average appreciation rate in Denver being somewhere between 8 & 10% over the past 5 years, this means that a $300,000 home today would cost anywhere between $24,000 – $30,000 in a 12 month period. That’s $2,000 – $2,500 each month! Very few people have the ability to put aside this kind of coin to keep pace with this rapid pace of appreciation.
So, how do you purchase a home (and I mean pretty much any home) with only $1,000? Here’s the strategy.
4% Grant and 5% Silent Second
The Colorado Housing & Finance Authority aka CHFA (pronounced CHA-FUH) is probably the largest down payment assistance provider in the state of Colorado. Currently, CHFA is providing a 4% non-repayable grant or a 5% silent 2nd mortgage for down payment assistance. If you were to take advantage of the 4% grant today, you don’t need to live in the home for any period of time to make the grant money non-repayable. You could use the 4% grant, buy on Monday, and sell on Tuesday, and be obligated to pay ZERO of the grant money back. Of course, you would need to occupy the home for at least one year past closing as your primary residence before converting to a rental property, but again, there is NO repayment of the 4% grant and no required time frame to make the 4% grant non-repayable like grant money of the past that typically had 5 year requirements.
With the 5% silent second, the rules change a little bit. CHFA calls the 5% in assistance a “silent second” because it truly is a second mortgage that is recorded behind your first mortgage when you purchase the home. The “silent” piece kicks in, because this second lien does NOT accrue interest (0% rate) meaning that if the silent second was $15,000 today, it would also be $15,000 30 years from now. The silent second does not have a monthly payment associated, and the only time the silent second becomes repayable (unlike the grant) is when you go to sell the home, refinance, or otherwise payoff the mortgage over the 30 year period.
Currently, the minimum required down payment for the CHFA Preferred Plus conventional loan program is 3% which would equate to $9.000 on a $300,000 home. Now, let’s also assume that the closing costs & pre-paid expenses are about 2.7% of the purchase price, or around $8,100 (closing costs are typically higher on down payment assistance loans due to an extra 1% origination fee). This means that your total cash outlay before the down payment assistance or any other credits is about 5.7% of the purchase price, or $17,100 ($300,000 x 5.7%). The 4% grant is based on the loan amount borrowed (not the purchase price), or in this case $11,640 in total down payment assistance. The key benefit of the down payment assistance grant, is that the grant can be used towards your actual down payment of 3% whereas agent credits, lender credits, and seller concessions can only go towards your closing costs & pre-paid expenses on non-down payment assistance loans. The 4% grant is enough to cover the entire 3% down payment and most of the 1% origination fee that is charged on DPA loans. In our scenario, 5.7% in cost (down payment + closing costs + pre-paids) minus the 4% grant = 1.7% of the purchase price leftover (approximately $5,100 for our scenario).
In order to keep our cash to close at $1,000, we would need to work in a $4,100 seller concession, agent concession, or a combination of seller + agent concession. Why would the seller want to give us $4,100? They probably don’t. But maybe they would be receptive to giving us $4,100 if we offered $305,000 for their $300,000 instead, which would leave them with an additional $900 compared to what they were looking to net on the sale. The home would of course need to appraise at the higher amount, but this is a technique you can use to have the seller pay for the remainder of your closing costs.
So why the $1,000? Why not $100? Why not $1?
With all of CHFA’s down payment assistance loans, the minimum required investment is $1,000 of the borrowers own funds into the transaction. The $1,000 can be a combination of earnest money, appraisal funds, inspection fees, etc. The buyer/borrower simply needs to have a $1,000 into the transaction in some way, shape, or form. The $1,000 may be gifted by a family member like parents, brothers, sisters, uncles, aunts, & grandparents, so even though CHFA’s rule is $1,000 of your “own money”, this amount MAY be gifted.
What if my earnest money is $3,000?
In our scenario, the typical earnest money requirement would be around 1% – 1.5% of the purchase price. Earnest money is simply a piece of your down payment that is paid upfront at the time your offer is accepted by the seller, otherwise known as being “under contract”. So what if your earnest money is $3,000 and all of your closing costs are being paid for by the seller, agent, or a combination of the two? If you only need $1,000 into the transaction, you would actually be REFUNDED $2,000 at closing by the title company.
This strategy works on just about every purchase price. As the purchase price increases, the down payment and closing costs would increase in tandem, but the down payment assistance would increase as well. CHFA down payment assistance is available in every county throughout the state without any geographic restrictions. CHFA does have an income restriction based on the “qualifying income” used for the loan application, and this is much different from years prior. In the past, CHFA used to have an income limit based on the household and how many family members over the age of 18 living in the house that are also earning an income, but CHFA changed this rule in March of 2016 to only “qualifying income” used on the loan application. Recently, CHFA initiated a statewide income limit of $115,600 for a 1-2 person household in a non-targeted area. If two people live in the home, and each person earns $80,000 for a combined household income of $160,000, as long as one of these people qualifies for the loan themselves, you could simply put one person on the loan application and still qualify for CHFA down payment assistance. Before CHFA made this change to qualifying income vs. household income, this scenario would not have worked.
One of the last requirements that CHFA has on all of their loan programs, is the homebuyer education certificate requirement. On all loans, CHFA requires all borrowers on the loan application to complete a homebuyer education class with a HUD approved state counseling agency. These state agencies are non-profits, and attending the class in person does not cost a thing. About 6 years ago, these state counseling agencies started offering an online homebuyer education class that costs $99 for the first person, and $49 for each consecutive person after the first.
All other standard qualifying criteria would apply from here (e.g. debt-to-income ratios, credit, assets, etc.), and CHFA provides conventional & FHA loan types, both with either the 4% grant or 5% silent second for down payment assistance. CHFA down payment assistance is NOT available for multi-family homes, and the down payment assistance only work on primary residences (no investment properties or 2nd homes). It’s a great option to enter the market and get started with an incredibly low down payment.
At the end of the day, it is absolutely possible to purchase a home with only $1,000 as long as you can work in seller or agent concessions into the deal to help offset that last little bit of closing costs. The CHFA down payment assistance loan can be a great way to enter the real estate market with a very low down payment, purchase a starter home, and trade up to another property after a few years of appreciation and principal pay down.
To learn more about CHFA’s down payment assistance program, watch my video at
Seth Wilcock | VP/Branch Leader – Producing
Wilcock Team – NOVA® Home Loans
M: 720-590-2492<tel:720-590-2492> | F: 720-880-3039<tel:720-880-3039>