FAQ – Can I Reserve Funds For A Down Payment Assistance Program

This is a very important question, and one which has caused many transactions to fail.  Let’s start with the most basic fact, when the money is gone, it is gone.  The trick is to make sure that

• You get some for yourself
• If you can’t get it before the program runs out of money, that you at least don’t loose any of your own money.
• It is important to have a clear understanding of the funding status and share this with the seller.  Here are a couple of reasons why.
  • In the case of a program which is nearly out of funds, clearly and honestly presenting the seller with the facts up front will better you chances of the seller returning your Ernest Money Deposit.
  • So many agents try to do these programs and just don’t have the background to get the transactions through.  The end result is listing agents and sellers who are skeptical of the programs.  They are afraid to accept an offer with a DAP attached.  It is in everyone’s best interest to insure that the agents, lenders, buyer and seller have accurate and current data on the programs.

Reservations:

• Yes.
  • Some Down Payment Assistance Programs will provide reservations for the buyer prior to the buyer entering escrow.  This should not be looked at a guarantee (even if they guarantee it).  In these cases, the DAP received “x” dollars in funding and start setting aside allotments of these funds to those who apply.  The buyer is told that the funds are on hold for them for “x” number of days.  As long as the buyer enters escrow before the assigned date, the funds remain on hold for the buyer through the escrow period.  If the buyer fails to enter escrow prior to the expiration date, then the funds are released back into the DAP pool of funds and are available for the next person on the list.  The person who just lost their reservation goes back to the bottom of the list and has to wait for another turn.  From this description you can imagine that there is some accounting involved and if the DAP administrator does not carefully keep track of the reserve funds flowing to and from the DAP pool of funds, then they could think that they have more money than they do. As the DAPs funds get closer to being depleted, the administrator will do an audit of the funds.  It is at this time that people with outstanding reservations are at risk.  If the audit finds there are not enough funds to cover the outstanding reservations, then the reservations are rescinded.  You can see that careful communication and good inter-company report is essential to success.
• NO
  • Some Down Payment Assistance Programs avoid the problems associated with the reservation system by just not offering any pre-escrow reservations.  Once the buyer has an accepted offer, his loan is completely underwritten and all conditions are signed off, then the loan company applies for the Down Payment Assistance Program.  Once the DAP application is received and approved, the money is reserved for the clients.  While this may seem like a less attractive system, it many times ends up working just as well or better.  The reason for this is that if the buyers lender and the buyers agent have done their job and checked on the status of the funds, they will set the correct expectation at the onset of the transaction.  The correct expectation when any DAP is running low on funding is “Funds are running low, we believe that our application will be approved but there is no guarantee”.  Now many agents, buyers and sellers immediately jump to the conclusion “Why would any seller accept an offer like that.”  The answer is they accept them all the time.  The seller is usually interested in getting as much money for their house as possible.  If your offer is the best offer, they will want to take it.  Will this happen every time?  No, if your offer nets the seller a small additional amount, they will go for the faster easier transaction.  If your offer nets the seller several thousand dollars more than the next best offer, they will many times take the chance.   What we are really talking about here, is what happens if the transaction does fail.  If you were honest and set the right expectation with the seller, they will more likely be honest and return your earnest money deposit.

Protecting Your Earnest Money Deposit.

• When you write an offer, you agree to put some money up to show good faith.  Basically what you are saying to the seller is “It is okay to take your house off the market and enter a transaction with me because I am serious about buying it.”  There is no set amount of how much you must put down, but generally the minimum seems to be about 1,500 dollars.  This is sometimes called an Earnest Money Deposit (EMD) or Good Faith Deposit (GFD).
• In the contract it will state that you have a contingency period in which you can get your loan (and Down Payment Assistance Program) approved.  At the end of that period of time, you remove your contingency.  Example, 17 day loan contingency period indicates that you have 17 days to get your loan approved.
• There are many different types of contingencies that are in place when you start the transaction.  One by one you remove them or ask for an extension.  If you ask for an extension and the seller refuses, you must remove the contingency or walk away from the transaction.  Until all of your contingencies are removed, you can walk away from the transaction and get your Earnest Money deposit Back.  Once all or your contingencies are removed, if the transaction fails for any reason, the seller has the right to keep your Earnest Money Deposit.
• As you can see, keeping your contingencies in place for as long as possible is highly advantageous to the buyer (it guarantees you get your EMD back).
• A key element to getting the seller to agree to extend your contingencies is setting the correct expectation up front.  Through good understanding of each programs timelines, the agent can communicate the correct timeline and as your contingencies expire the seller is not caught off guard when you ask for the extension.  A superior understanding of the Down Payment Assistance Programs and Honesty is always the best approach to not only the success of the transaction, but preserving the buyers funds in times of failure.