Jane Adler is a Chicago-based freelancer writer.
Housing Opportunity: Dallas
A downpayment and mortgage assistance program creates affordable option for first-time homebuyers in Dallas.
November 1, 2003
A house isn’t affordable if you can’t make the downpayment.
Just ask Venora Johnson, 27, who lives with her two children in Dallas. “It’s hard to save when you’re a single parent,” says Johnson, who works at a bank in accounts investigations and makes $27,000 a year. “I really wanted a place to call my own. But the downpayment was a real stumbling block.”
Johnson spent several years trying to figure out a way to buy a house. Her dream of homeownership became possible when a friend told her about a downpayment and mortgage assistance program run by the nonprofit group The Enterprise Foundation. The friend also put Johnson in touch with Avangard Real Estate Services Inc., a Dallas company whose sales staff understands the program and regularly uses it with first-time homebuyers.
Avangard helped Johnson find a three-bedroom house she liked for $89,900. And Johnson qualified for a $12,000 subsidy from Enterprise to help pay for it. A conventional mortgage financed the remainder of the purchase. At closing, Johnson paid just $830 out of her own pocket.
Overcoming the Big Obstacle
Like Johnson, downpayments can stand in the way of homeownership for many first-time buyers.
“You can have people with reasonable credit and earnings capability, but they still can’t buy a house,” says William Apgar, senior scholar at Harvard University’s Joint Center for Housing Studies in Cambridge, Mass.
The idea that downpayments stand in the way of homeownership for many mid- to low-income Americans is not new. However, the federal government, local municipalities, and nonprofit organizations have dealt with the issue in different ways in accordance with the prevailing economic conditions.
Prior to the late 1990s (when interest rates were higher), the effort to increase homeownership concentrated on providing assistance in the form of a lower overall interest rate for the mortgage, says Apgar. "Since then, the focus has been on down payment assistance because of the emerging realization that folks could pay a mortgage, but they had a hard time coming up with a down payment," he says.
As a result, mortgage assistance programs have flourished over the last five years. These programs are run by private banks and by nonprofit organizations that tap government money. Other programs rely on seller-financed downpayments, although these programs in particular have recently come under scrutiny in recent years.
Even Congress is stepping into the arena. The U.S. House of Representatives recently approved the American Dream Downpayment bill. If approved by the U.S. Senate and signed into law, the bill would provide $200 million in grants in each of the next two years to cover downpayment and closing costs for first-time, low-income families.
Another obstacle to homeownership may be the lack of understanding by potential beneficiaries of the mortgage assistance programs. They either don’t know that the programs exist or don’t understand how they work. According to the 2002 Fannie Mae National Housing Survey, more people could become homeowners if armed with the correct information. The survey found that 30 percent of Americans believe erroneously that you need to pay 20 percent of the cost of the home upfront. The number is higher among minorities, with 39 percent of both African Americans and Hispanics holding the erroneous belief.
“Many people, particularly minorities, are not aware how easy and affordable it has become to buy a home,” Franklin D. Raines, Fannie Mae chairman and CEO, said in announcing the survey. “Too many obstacles, such as knowledge about the process and saving for a down payment, continue to slow minorities on the path to homeownership.”
Dallas Gets It Right
The city of Dallas serves as a good example of a program that has been able to successfully provide downpayments assistance to its residents. Although the program is administered by The Enterprise Foundation, it is funded by the city using money from the federal government.
Over the last 10 years, the program has helped first-time buyers to purchase approximately 3,500 homes—both new and existing ones. The houses are located throughout the city, although most are in south and west Dallas. This year, the program will spend about $5.2 million to assist homebuyers.
“What we are doing is providing a subsidy to qualifying first-time buyers who purchase a home in the city of Dallas,” says Lorenzo Littles, Dallas director for The Enterprise Foundation, a Columbia, Md.-based organization that focuses on affordable housing issues.
How It Works
The subsidy is structured as a second mortgage on the purchased property—a common financing arrangement these days for homebuying grants. The subsidy pays for closing costs, a downpayment, and also decreases the cost of the house. This often allows buyers to purchase a better house than they might have otherwise been able to afford, Apgar says. For instance, an eligible homebuyer might qualify for a $12,000 second mortgage, or subsidy. To purchase a $60,000 home, the buyer would only need to qualify for a first mortgage of $48,000, instead of the original $60,000.
The provisions of the Dallas program include:
- The buyer doesn’t have to make monthly payments on the second mortgage, and the loan doesn’t have to be repaid until the house is sold. But the entire amount of the second mortgage is forgiven if the buyer lives in the house for longer than 15 years. If the house is sold before 15 years, the second mortgage must be repaid (without interest) to the city of Dallas, and that money is put back in the program for use by new buyers.
- Homes in the program must pass a quality inspection. The program provides as much as an extra $1,500 to the seller to make needed repairs.
- As with all affordable housing subsidy programs, homebuyers must meet certain income guidelines in order to qualify. Homebuyers at or below 50 percent of the area’s median income ($26,600 for a household of two in Dallas) can get up to $12,000. Those earning between 51 percent and 67 percent of the median income (up to $35,644) can receive up to $7,500. Homebuyers who earn 68 percent to 80 percent of the median income (up to $42,560) can get up to $5,000.
- Homebuyers also are required to attend homeownership classes—a condition of many mortgage assistance loans. Littles of The Enterprise Foundation says 10 counseling agencies citywide currently provide instruction.
Here’s a snapshot of current homebuyers in the Dallas program: The average household income of buyers is $29,867. About 63 percent of buyers are Hispanic. The average mortgage subsidy is $9,865. The average sales price of a home is $90,547. That compares to the current average price of a home in Dallas of $187,400, according to the Greater Dallas Association of REALTORS®.
The Road to Success
The Dallas program wasn’t always the success it is today. Originally, the program was run internally by the city of Dallas, according to Charles Brideau, housing development manager for the city. He says the city had trouble getting the money to the closing table on time. The quickest that deals could be funded was about seven days after they closed. “That’s just not how it works in the private sector,” says Brideau.
To solve the problem, The Enterprise Foundation took over the program in 1991 and changed the way deals were funded. The foundation has a $1.5 million revolving line of credit that is used to close the deals.
Making the program more efficient has helped attract about 40 participating lenders that provide the first mortgage. Lenders pay $1,500 per year to participate in the program; mortgage brokers pay $500 a year. The money is used to pay for homebuyer education classes.
“Now the system cuts through the red tape,” says Paul Lewis, president at Jubilee Mortgage Inc., a Dallas mortgage broker. “It has helped a lot more people become homeowners.”
The program has been refined in other ways, too. Previously, the city used its funds to help people who were purchasing existing homes, but that resulted in the annual program money being exhausted within the first few months of the year. So to stretch the dollars, the city now allocates 50 percent of program money for the purchase of new houses, which take longer to come to the market.
It also helps that houses in Dallas are relatively affordable, especially when compared to other big cities. Dallas ranks 27 in affordability out of 107 metro areas, according to the NATIONAL ASSOCIATION OF REALTORS®.
And a recent study by the Real Estate Center at Texas A&M University in College Station says the median renter income in Dallas ($35,800) is 13 percent higher than what is needed to qualify for a $92,000 starter home. “Housing in Dallas is pretty affordable for the average person,” says Jack C. Harris, research economist at Texas A&M University. “But it’s not affordable for someone with a small income, a bad credit history, or no savings.”
Real Estate Professionals Tap the Program to Help Clients
Antonio Matarranz, president of Avangard Real Estate Services and board director of the Greater Dallas Association of REALTORS®, uses the Dallas mortgage assistance program to sell about 50 homes a year. “When the program was new, it created paranoia among real estate professionals who said if you use the program, the closing will be delayed,” says Matarranz. “But now the loans don’t take more than a day or two longer than a conventional loan.”
Matarranz also has used the program to help develop 400 new homes. “We acquire the land and get it rezoned,” he explains, adding that vacant lots in Dallas cost anywhere from $7,000 to $35,000. Matarranz has six builders that construct the houses, ranging in price from $89,000 to $110,000. “Our buyers use the mortgage assistance fund every time,” he says.
Mellane Scott, who works at Century 21 Laurent in the Oak Cliff neighborhood of Dallas, has been using the mortgage assistance program for her first-time buyers since 1996. “I have been very successful with the program,” says Scott.
Scott figures she averages about $40,000 a year in commissions from deals in the mortgage assistance program, even though she only started to work full time last year. “People get nervous when they hear the word ‘assistance,’ but that’s why my business has grown,” she says.
To ease fears about the program, Scott holds homebuying seminars twice a year at the Friendship West Baptist Church in Dallas. The seminar she held last June had 300 attendees and generated six deals.
Nita Terry, 33, attended Scott’s seminar and recently bought a three-bedroom house on the southwest side of Dallas for $105,000. “I was really worried that I couldn’t afford the house,” says Terry. She makes about $31,000 a year as a professional development coordinator at Meeting Professionals International in Dallas.
Terry didn’t have the savings for a downpayment. But her income meant she could qualify for the mortgage assistance program. She received a subsidy of $8,000. Her monthly payment is $947 for the mortgage, insurance and taxes—about $300 more than she paid to rent an apartment. “But it’s worth it,” says Terry, who moved into her house in September, along with her grandmother and niece. “My living room is so pretty. I get that wonderful orange sunset through the windows every evening.”
Scott, who also works with sellers, says she makes sure the house is what she calls “Enterprise ready.” This means the house will pass the inspection before it’s put on the market. She also advertises the fact that the house already meets the program’s quality standards. “I have been able to get more people into more homes that way,” she says.
Overcoming the Reticence
Despite the growth of mortgage assistance programs, real estate practitioners tend to shy away from using them—especially programs run by government agencies. Real estate pros say deals through such programs are difficult to administer and often do not close on time.
But the Enterprise’s Littles thinks the best feature of the Dallas program is that the homebuying process mirrors that of a normal home purchase. In other words, it’s not run like a government program with lots of red tape and delays. Also, the program welcomes the participation of mortgage bankers, title companies, and real estate professionals.
How’s the mortgage assistance program working? Using default rates as a measure, the program seems to be doing well. Littles says the default rate is less than 2 percent—a low rate compared to other mortgage assistance programs.
But other measures of success are just as important, according to Matarranz. He finds it personally rewarding to work with first-time buyers who need help. He says: “When you see the satisfaction that comes from a first-time buyer who was paying $750 in rent and now has the same monthly payment for his own house ... the feeling you get is incomparable.”
First-time homeowner Johnson, for one, couldn’t be happier about finally having her own home and plans to stay in it for the long term.
“I plan to make this house my home,” she says.
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Updated: July 01, 2022