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2. Down Payment Assistance
The barriers to homeownership are many, but one reigns supreme—the down payment. A 2018 Zillow Housing Aspirations Survey conducted with the Urban Institute found that down payment is the leading barrier consumers cite in their path to homeownership.45 While the fate of the current Build Back Better bill remains uncertain at the time of this writing, it includes DPA to firstgeneration home buyers, a testament to the momentum behind the use of DPA to expand homeownership.46
Even modest assistance can increase the number of low-income and minority households able to purchase homes.47 Down payment subsidies increase the number of qualified mortgage loan applicants without increasing the overall size of the loan.48 Programs that take the form of grants, rather than loans, transfer equity to the homeowner if conditions of the grant are met. After the Great Recession, most state HFAs added some form of DPA product to their loan portfolio.
While DPA loan specifications vary widely by HFA, DPA is a central HFA product. NJHMFA offers a DPA program that provides a flat $10,000 to qualified first-time home buyers. The assistance is an interest-free loan, forgivable after five years if the homeowner stays in the residence. The DPA must be paired with an NJHMFA first-time mortgage loan. The following are simple yet effective recommendations to enhance the DPA loan program.
Throughout the course of this research, the team investigated many of the county- and city-level DPA opportunities throughout the state of New Jersey. There are many different opportunities that require extensive research by the potential home buyer and bear significant bureaucratic hurdles, including lengthy application review timelines and cumbersome application processes. Due to the barriers and administrative challenges associated with accessing these resources, we do not recommend pursuing a formal strategy of layering DPA with these local resources. This may, however, remain a point of consideration for the future if NJHMFA chooses to allocate staff bandwidth to this coordination challenge.
2.1 Increase the base DPA amount to $14,000, and fix DPA to the maximum home purchase price
NJHMFA should increase the base DPA from $10,000 to $14,000 so home buyers can be more competitive in purchasing homes across a broader range of New Jersey counties. The loans should scale alongside the maximum purchase price limits and maximum income limits already set by NJHMFA.
DPA DESIGN AND GEOGRAPHIC CONCENTRATION
Over 75 percent of DPA loans originate in Camden, Gloucester, Burlington, and Atlantic Counties, where median home values are among the lowest in the state. This is not surprising—$10,000 goes further, as a percentage of home value, in counties with lower housing costs.
Homes in these counties do not appreciate at the same rate as other higher-value counties in
FIGURE 4. DPA LOANS BY MUNICIPALITY PER 1,000 PEOPLE, 2016-2020
Source: This map depicts the number of NJHMFA DPA loans per 1,000 residents within each New Jersey municipality. Population figures are drawn from the American Community Survey 2014-2019 5-year estimates.
the state. In Camden, the county with the most DPA loans, homes depreciated by 3 percent from 2014 to 2019. Homes in Gloucester, Burlington, and Atlantic Counties depreciated by 1 percent. Meanwhile, homes statewide appreciated by an average of 4 percent, buoyed by counties in North and Central New Jersey.49
For NJHMFA to narrow the racial wealth gap, its products must be used in communities where homes appreciate in value. But today, its loans are concentrated in counties where homes do not appreciate as quickly as in the rest of the state—if they appreciate at all. These data underscore a sentiment from Reverend Eric Dobson, Deputy Director of the Fair Share Housing Center: “All this program is going to do,” he said, referring to the DPA program, “is push more segregation. You have a program that pushes homeownership in places that are rural and don’t have jobs.”50
Housing values have appreciated substantially since 2019. They appreciated the most in Ocean, Essex, and Monmouth Counties, where just 2.5 percent of the Agency’s loans originate. These disparities continue a trend that characterized the last decade: Values in the four counties that account for 75 percent of the Agency’s portfolio have appreciated on average 26 percent since 2010, compared with statewide appreciation of 38 percent, placing all in the bottom half of New Jersey counties for home value appreciation.51
The Agency should increase its DPA to allow recipients to buy homes in communities more likely to see appreciation. Because a flat $10,000 goes further in some counties than in others, first-time home buyers are more competitive buyers in neighborhoods with lower value homes and lower likelihood of home appreciation.
DPA PRODUCT INNOVATIONS
NJHMFA should increase DPA for a second reason. Today, the value of DPA is outweighed by the cost of private mortgage insurance (PMI). Consider a $311,979 home, the maximum qualifying value set by NJHMFA for a single-family unit in Mercer County. PMI for the first year alone amounts to $8,111.45, almost the entire DPA. After closing costs are considered, the DPA covers approximately 37 percent of the initial purchase costs. It is worth underlining that the current maximum price set for Mercer County by NJHMFA is roughly 20% less than the 2021 median price for Mercer County.52
FIGURE 5. RECOMMENDED DPA BY COUNTY
Counties NJHMFA 1-Family Maximum Home Purchase Price Limit NJHMFA 50% Target for DPA Proposed New DPA Amounts
Atlantic, Cumberland, Mercer Warren $311,979
$326,195 $13,649
$14,271 $14,000
$14,000
Burlington, Camden, Cape May, Gloucester, Salem $377,540 $16,515 $16,500
Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union $719,953 $31,499 $25,000
Source: NJHMFA 1-Family Maximum Home Purchase Prices have been developed from NJHMFA. The proposed new DPA amounts were calculated by the authors of the report.
Given the barrier that the down payment and other upfront costs pose for the home buyer, we recommend that the Agency increase the base DPA to $14,000 and further increase it according to the geography, similar to the current county-specific income and home price limits. In our analysis, we aimed to cover 50 percent of the upfront costs to the homeowner. These costs consist of an estimated 3.5 percent down payment, 3.5 percent closing costs, and a 1.75 percent PMI fee. Closing costs and PMI are rough estimates and will vary somewhat by buyer.
We chose $14,000 as the new base DPA because it covers 50 percent of the upfront costs in Atlantic, Cumberland, Mercer, and Warren Counties. Our recommendation to scale the assistance aligns with practices at other HFAs. With clear messaging, NJHMFA can avoid confusion around the different tiers. Following the example of MassHousing, NJHMFA may choose to advertise “down payment assistance of as much as $25,000.”53
COSTS AND FUNDING
We estimate that NJHMFA committed $13,650,000 to the DPA program in 2020. If our proposed DPA amounts had been offered to the same 1,365 home buyers that year, the program would have cost $21,050,000, an increase of $7.4 million. This does not account for geographic changes to NJHMFA’s portfolio that may result from the expanded funding.
IMPACT ON NEW JERSEY’S RACIAL HOMEOWNERSHIP GAP
homeownership gap is contingent on how the DPA loans are allocated. By increasing the amount of DPA funds available to each home buyer, NJHMFA enables home buyers to compete in higher appreciating neighborhoods and to combat the lack of generational wealth that many home buyers of color face. To fully leverage this recommendation toward reducing New Jersey’s racial homeownership gap, this must be paired with the targeting goals suggested elsewhere in this report.
2.2 Leverage New Jersey Individual Development Accounts to increase available assistance to first-time home buyers
Individual development accounts (IDAs) are matched savings accounts that help households save for specific goals like homeownership. One study has found that IDAs can increase the homeownership rate among participants by 11 percentage points.54
New Jersey home buyers are eligible for two IDAs: the Temporary Aid for Needy Families (TANF) IDA55 and the New Jersey HOME IDA.56 Both are implemented by the Department of Community Affairs. Program eligibility is provided in Figure 6.
NJHMFA should coordinate with the Department of Community Affairs to harmonize DPA and IDA programs for firsttime home buyers who qualify for both programs. In addition to the Agency’s DPA, for those who qualify for both IDAs, these programs could provide first-time home buyers up to $13,000 to cover a down payment, closing costs, and mortgage insurance.
OPPORTUNITIES FOR COORDINATION
Department of Community Affairs and other organizations to promote IDAs, as other HFAs already do, and bundle them with DPA. For example, the Indiana HFA markets IDAs on its website and provides a list of administrators to supplement its support for first-time home buyers.57 The New York HFA previously provided an IDA program a different agency now administers.58,59
The NJHFMA should, at the least, promote the New Jersey HOME IDA as a supplemental option to DPA, given the programs’ similar eligibility criteria. This would provide firsttime home buyers with $7,000 in additional assistance. When bundling both programs, the Agency should allow its trainings to satisfy the homeownership education requirements of IDAs so that buyers can more easily participate in both programs. There is growing interest in IDAs as New Jersey recently passed a law in January 2020 to expand the benefits and eligibility requirements for the TANF IDA.60
IMPACT ON NEW JERSEY’S RACIAL HOMEOWNERSHIP GAP
Increasing the money available to home buyers of color for upfront homeownership costs increases the affordability of homeownership. This would increase the number of homeowners of color and narrow the racial homeownership gap.
Funding Entity
Matching Ratio
New Jersey HOME Individual Development Account
TANF Individual Development Account
State
2:1
Maximum Contribution $3,500 Federal
2:1
$3,000
Maximum Matching $7,000 $6,000
Maximum years of account 2 years (5 with extension) 3 years (5 with extension)
Maximum contribution per year Minimum length for fund withdrawal
Income Eligibility61 $1,750
6 months
120% of County AMI First-time home buyer $1,000
6 months
250% of Federal Poverty Level
Examples of Qualifying Expenses
Down payment, settlement fees, financing or closing costs, title insurance, attorney fees, inspection fees, acquisition costs, construction or reconstruction, appraisal fees, mortgage insurance (as part of closing costs) and other customary prepaid expenses. Training Requirements •10 hours of financial literacy •10 hours of homeownership counseling •First-home purchase (same as HOME IDA) •Education and job training •Small business support
•10 hours of basic financial literacy •10 hours of homeownership counseling
Source: “The New Jersey Federal Individual Development Account Program, TANF IDA Program Manual,” New Jersey Department of Community Affairs; “The New Jersey Home Individual Development Account, HOME IDA Program Manual,” New Jersey Department of Community Affairs; New Jersey P.L. 2019, c. 460.
