If you are looking to buy a home with an FHA Loan, a minimum 3% down payment is typically still required to qualify. Not all home buyers have this much saved up. However, they are in good financial standing and meet all other qualifications for a home loan backed by the Federal Housing Administration (FHA).
This is where the new Down Payment Advantage (DPA Loan) comes in to give FHA borrowers even more purchasing power. A DPA Loan is basically a second mortgage loan to cover the down payment. This allows the home buyer to borrow 100% of the purchase price with a combination loan.
The down payment comes from a second mortgage approved by the lender. At Transparent Mortgage, we are able to approve these loans in-house, which really streamlines the process for our clients.
How Does a DPA Loan Work?
The borrower can receive up to 3.5% of the sales price or appraised value of the home (whichever is lower). The proceeds can then be applied toward the down payment and/or closing costs on the loan. The loan is usually set at 6% interest with a 10-year payback period, and is considered a “second loan” separate from the primary FHA Loan covering the remaining funds. The borrower is not able to get cash back from a DPA Loan. It must be applied toward the home purchase.
How Do I Qualify for a DPA Loan?
Down Payment Advantage Loans are not available to everyone. The borrower must still meet standard FHA Loan requirements for their primary loan. A DPA Loan will require a minimum 640 FICO score to qualify and the maximum combined loan amount cannot be greater than $548,250—no matter which county you are in. There is also an income limit for this program, but it can be grossed up to 160% and that opens up significant qualification opportunities for many different buyers.
Will I Still Have to Pay Mortgage Insurance?
It is important to note that a DPA Loan will not eliminate private mortgage insurance premiums (MIP or PMI). The borrower will still have to pay mortgage insurance until 20% of the purchase price has been paid off. The DPA Loan is simply a tool to allow a borrower to avoid making a down payment.
Is a DPA Loan Right for Me?
This is a second loan and you will be responsible for paying it back along with your primary FHA Loan. It is not free money, so it is important to do your research, plan your budget and run the numbers to make sure this is a good solution for you. If you do have the money to put down, that is still recommended to get better interest rates and minimize your interest costs over the life of your loan(s). This is simply another option to consider if you are in good financial standing, but can’t quite afford the minimum FHA down payment.
For more information about DPA Loans and FHA Loans, and to get started on your home loan pre-approval, contact Transparent Mortgage today!