Loan Programs
A Little DAP will do you
By Dan Smith

A little DAP will do you

One of the newest features available in home finance is the “Down-payment Assistance Program” or DAP. Originally designed to create up to 106% financing options for FHA loans, DAP is now available on many conventional loan programs as well. In essence, the DAP allows a seller to make a tax deductible contribution to a charity, which in turn makes a grant to the buyer for down-payment and closing costs. Since when can a seller make the buyer’s down-payment for him, you ask? I must confess that was also my initial response when the program first appeared. However it is no joke, and knowing the pro’s and con’s of this feature may save (or cost) you thousands of dollars in your next home transaction. So let’s take a closer look this month at DAP for ourselves.

In both FHA and Conventional home lending, it has always been the rule that the source of a down-payment can come from a charitable organization. The problem was that no charity ever felt inclined to grant money for this purpose. But DAP has changed that. Now there are several charities, like Colorado Cares and Neighborhood Gold, approved to handle this type of transaction. Let’s say that you are buying a $250,000 home. Let’s also assume that you are short of cash to make the down-payment and closing costs by $6000. If the seller agrees, as a function of the purchase price, he can make a charitable contribution of approximately $6500 to one of these approved charities. The charity keeps the extra $500 and then grants the remaining $6000 back to you at the closing.

The advantage to the buyer is obvious, in that the average person can now buy a home with $0.00 dollars out of pocket. But the downside may not be as obvious. The seller may not have planned on reducing his net proceeds, by enough to fund the gift amount that is needed. So in most cases, the purchase price may be inflated marginally to accommodate for this extra expense. If the new buyer needs to move anytime soon after the purchase, he may find it harder to sell for the inflated price he recently paid. But barring an early resell, the buyers who use DAP wisely can experience the dream of home ownership sooner than they may have imagined. Those of you with college bound children take note. You can use a DAP in conjunction with FHA’s “Kiddie Condo” program, to purchase college housing for “nothing down” too!

For sellers, the advantage is that they make their home available to a much larger segment of the buying public. Not only does this reduce the marketing time, but DAP provides an extra tax write-off as well. The only concern is to be careful you understand the impact to your “net proceeds”. Don’t hesitate to ask your listing agent to provide a modified “estimated net proceeds” analysis, before you agree to providing a DAP to the buyer. You would also be well advised to discuss the tax benefits with an accountant, to confirm the affect of a DAP in your specific tax bracket. The only down side may be that conventional loan limits are currently $359,650. So if your home is worth more than that, DAP is currently not available as a sales tool for you.

If you would like more information on this or any other type of home financing, call the professional. You can reach Dan Smith at 303-674-2205 direct, or visit him on the web at www.ColoradoHomeLoans.com


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