Best Practices

Down Payment Assistance Program Administration

In consultation with an advisory group of city and county officials, lenders, Realtors® and housing nonprofits, the Minnesota Homeownership Center is proud to unveil a slate of down payment assistance (DPA) program administration best practices. The goal is to increase consumer access and improve outcomes by facilitating standardization and transparency.

Streamlining the down payment assistance delivery system will ensure that funding is easily accessible, sufficient enough to have an impact, and efficiently targeted toward those facing the greatest barriers to homeownership. These practices will enable more successful purchase transactions and help to reduce Minnesota’s racial homeownership gap – one of the worst such gaps in the country.

Consumer Forms – Understanding Down Payment Assistance

Best Practices

The table below includes columns for Standards and, where applicable, Advancing Racial Equity.

  • Standards focus on ensuring that DPA programs offer effective terms that support homebuyers in achieving sustainable homeownership.
  • Advancing Racial Equity highlights additional strategies that program administrators can implement to address racial disparities in homeownership.
 

Standards

Advancing Racial Equity

Eligible 
Homebuyers
  • First-time homebuyer
  • Maximum borrower income ≤ 100% of Area Median Income
  • Occupy the home as their primary residence
  • ITINs (Individual Taxpayer Identification Numbers) are accepted

Utilize a targeted approach:

  • First-generation homebuyer (never owned a home or owned a home but lost it due to foreclosure AND whose parent or prior legal guardian either never owned a home or owned a home but lost it due to foreclosure.; allow self-attestation)
  • Special Purpose Credit Program (allows eligibility to be limited to an economically disadvantaged class of persons)
  • Allow maximum borrower income ≤ 115% of the Area Median Income

Amount of Assistance
  • Amount is ≥ 3-5% of the county median home price. NOTE: The frequency of adjustments correlates to market fluctuation.
  • Funds can be used for down payment and closing costs, including prepays, permanent interest rate buydown, and principal reduction.
  • Targeted programs offer 10% -20% of county median home price in assistance to improve affordability and access.

Repayment

The following options are allowable:

  • Non-amortizing second lien repayable at sale, refi or maturity of first position mortgage
  • Forgiven on a pro rata basis or in full, after continuous owner-occupancy that is less than or equal to the term of the first mortgage
  • Amortizing second lien with an interest rate equal to or less than the first mortgage rate, and a repayable term equal to or less than the term of the first mortgage

For all options, if the combined Unpaid Principal Balance (UPB) is below the sales price or appraised value at repayment or in the event of a financial or personal hardship, the balance is forgiven.
  • Target programs and extend forgivable repayment terms for all or a portion of the assistance in order to support wealth creation

Qualifying Income
  • Lender-qualified income is used when the funding source allows. Lenders are required to disclose any excluded income and the reason.
  

Administrative
Fees Paid by
Homebuyer
  • Borrower fees not included unless there are unpaid administration costs
  • To support the cost of administration a flat fee, not to exceed 3%, can be charged to the borrower and if allowable, paid from DPA proceeds.
  

Re-Subordination
  • Allowable if in the best interest of the borrower and results in a lower interest rate and/or payment OR prompted by a life event such as death or divorce of one of the borrowers
  • Cash out restricted to home improvement or repairs
  

Homebuyer Education and Advising
  • Borrower must complete an approved homebuyer education course before signing a purchase agreement. Recommended format is instructor-led education, offered in person or virtually. Approved courses are Home Stretch and Realizing the American Dream. If self-guided courses are allowed, Framework Homeownership or Freddie Mac CreditSmart are the approved options and there is the additional requirement of one-on-one homebuyer counseling.
  • Borrower purchasing a 2- to 4-unit property also must complete owner-occupant landlord training
  

Homebuyer Contribution
  • Borrower not required to contribute more funds than required by first mortgage
  

Eligible
Properties
  • 1-4 unit detached plus townhomes, condominiums, co-ops and manufactured homes titled as real property
  • Shared equity, community land trusts and other resale restricted properties
  • Establish maximum purchase price limits using a standard index such as: FHA Mortgage Limits, MN Housing Start Up, HOME Homeownership Value Limits
  

First Mortgage

Fixed rate, fully amortizing first mortgage loan that meets CFPB “Qualified Mortgage” definition or is originated in compliance with the nonprofit exemption to the Ability to Pay rule, including:

  • GSE fixed-rate products including high balance loans, and government loans from FHA including 203k, USDA, VA and HUD 184
  • HFA fixed-rate products and fixed-rate portfolio products offered by CRA depositories or credit unions
  • Sharia-compliant products that meet above standards
  • ITINs (Individual Taxpayer Identification Numbers) products that meet the above standards.

Contract for Deed is only allowable if administered by an established nonprofit housing organization providing ongoing support and housing counseling

  

Qualifying Ratio
  • Minimum housing ratio is not less than 25% as calculated by the first mortgage lender.
  • Maximum debt-to-income ratio is not greater than 50% as calculated by the first mortgage lender.
  

Asset Limits
  • Borrower liquid assets do not exceed $50,000 after closing and exclude: retirement accounts, life insurance, and college savings accounts.
  

Gift Contributions
  • Total gift funds do not exceed 10% of the purchase price.
  

Layering
  • Can be stacked and layered with other down payment assistance programs
  • Allow for any lien position and subordinated to the first mortgage
  

Fund
Reservation
  • Available to borrower who is preapproved for a first mortgage and has completed homebuyer education (not contingent on the borrower executing a purchase agreement)
  • Can be reserved for a minimum of 60 days and allowing at least one extension equal to the original the reservation period (once a purchase agreement has been executed, a minimum of 60 days allowed for closing)
  • New construction allows a reservation period of at least 180 days
  

Underwriting
and Closing
  • Same as first mortgage

Download a PDF of the Best Practices

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Consumer Forms – Understanding Down Payment Assistance

These forms were created by a committee of subject matter experts to help homebuyers better understand how Down Payment Assistance (DPA), whether forgivable or repayable, impacts them as homeowners. They are intended to be shared with consumers by industry professionals when DPA is being used in a home purchase transaction.

Overview of the Understanding DPA Forms Download the Repayable DPA Fillable Form Template Download the Forgivable DPA Fillable Form Template