The Hidden Cost Of A Utah Housing Mortgage Loan

You may have heard of the Utah Housing down payment assistance mortgage loan.

Perhaps you mentioned you were saving up a down payment for a house, and a real estate agent wanted you to know there are loan options that don’t require one.

As well intended as this advice is, what your agent most likely doesn’t know is the actual cost of this type of loan. So let’s get into the details.

What is a Utah Housing mortgage loan?

It’s a down payment assistance loan for first time homebuyers who qualify with the income and purchase price limits set by Utah Housing.

Your Utah Housing mortgage loan will be comprised of :

• a main mortgage loan that is either FHA, VA or Conventional 
• a second mortgage that will contain your minimum down payment requirement + loan closing costs.

Your down payment requirement is essentially financed into a second mortgage, along with your closing costs. Doesn’t sound too bad, right? Except there’s always a catch, and a trade that happens. 

What is the downside of the Utah Housing mortgage loan?

1. Your main mortgage loan will always have a higher interest rate/closing costs than what you can get shopping around.
2. In addition to the main mortgage, you’ll also have a second mortgage that will have a 1% higher interest rate than the main mortgage, not to exceed 8%.
3. You’ll likely be upside down on your home value until market appreciation catches up (and it has been slower these past 2+ year due to the high mortgage rate environment we’re in)

Maybe having a 1st mortgage at a higher interest rate can justify the additional risk of lending to a borrower with “no skin in the game”. But it gets worse.

Your second mortgage finances the minimum down payment requirement, plus a bunch of fees you wouldn’t have on a regular down payment loan. It’s been a while since I’ve seen a Loan Estimate from Utah Housing, but usually there is a 1% origination charge, plus administration and processing fees. These fees will be present on your Loan Estimate on the 1st mortgage, but will be rolled into your second mortgage balance.

Assuming you’re okay with all the extra costs, there’s one more, and this is the most concerning to me.

Your Utah Housing second mortgage won’t subordinate to any other lender, only to another Utah Housing loan.

So if mortgage rates drop (like they did in 2020 and 2021) and there is an opportunity to refinance, you won’t be able to use another lender unless your second Utah Housing loan is paid off, or you have enough equity to pay off both loans with the refinance. See my blog post on how to refinance your Utah Housing FHA loan for more details.

These days you can refinance through Utah Housing at higher interest rates/closing costs. But for a long time, they didn’t even offer refinances. Let that sink in – given this is a program meant to increase affordability for low incomes.

How much more will a Utah Housing mortgage loan cost me?

Utah Housing posts their interest rates online, so you can actually look them up. It might be a little hard to understand if you’re not in the industry, but I’ll do my best to simply it. Here is the link to their rate sheets.

The mortgage interest rate offered to a borrower will be the base rate for the loan program assigned, plus the adjustments for credit score and special program risk factors, plus the permanent buy down cost if opting for a lower interest rate.

Here are some are numbers I ran for a client of mine that was trying to decide between a 3% down payment Home Ready/Home Possible Conventional loan, and a no down payment Utah Housing assistance mortgage loan.

*Please note that these numbers are for informational and educational purposes only, and may change with market conditions or guidelines changes. For a compliant quote specific to your scenario, please email me your details to [email protected]

Utah Housing Options vs Dana’s loan options:

1. 1st home mortgage program (FHA) was offering 6.625% at no cost, or as low as 6.125% at a cost of 2.5%  of the loan amount in  discount points (“rate buy-down”)

For the same scenario, if the borrower makes a 3.5% down payment and uses me as their mortgage broker, the interest rate options were as follows:

• 6.125% had a cost of $385
• 6.625% had a lender credit for her total mortgage closing costs of $6,176; Yes, CREDIT, not cost.

2. Utah Housing’s Freddie HFA ADV <80% AMI mortgage loan was offering 6.375% at a cost of 3.625% of the loan amount in discount points (rate buy-down) or 6.875% at a cost of 1.625% of the loan amount in discount points (“rate buy-down”)

For the same scenario, if the borrower was able to make a 3% down payment, the interest rate options with my best priced lender were as follows:

• 6.375% had a cost of $877
• 6.875% had a lender credit of $4,182 for her total mortgage closing costs

My borrower happens to have an amazing Dad who – when presented with the numbers – decided to gift her the 3% down payment needed. She dodged the Utah Housing mortgage “bullet” and will be in a good position to refinance if/when mortgage interest rates finally drop.

What if I don’t have a down payment?

The clients I’ve been able to help compare mortgage rates and costs have usually found a way to come up with a minimum down payment.

• The most common is a gift from a generous family member, such as a parent.
• Withdrawals or loans from 401k’s are also an option for those who have them.
• Last but not least, some cities of counties may have down payment assistance grants one might be able to qualify for. This last one might be tough because the income limits are very restrictive given the current home prices, but Own in Ogden is a great option to use as an example.

You may decide to wait and save some more.

Or you may just decide to use a Utah Housing mortgage loan. If you do, I won’t hold it against you – as long as you walk into it informed. And if you do end up with a Utah Housing loan, just remember to prioritize paying down/off that second mortgage, so you have good refinance options in the future.

Mortgage guidelines are always changing and adapting, and more lenders may come up with their own versions of down payment assistance. Shop around and ask questions – even if you don’t have a down payment saved up. Maybe a USDA loan is a good fit, and you didn’t even know about it.

Feel free to reach out with any questions via email at [email protected] , or use my secure online application link to submit a loan application.