Not everyone has the financial means to put 20 percent down on a home purchase, a common amount preferred by lenders and one that allows you to avoid the cost of private mortgage insurance. The good news is, forking over 20 percent upfront is not a requirement to buy a home. Plus, you may also be eligible for payment assistance programs.
How do down payment assistance programs work?
Down payment assistance can potentially give you money that can help you afford a down payment, or it can help with closing costs, which are the fees and charges you pay when you finalize your mortgage. This is approximately 2 to 5 percent of the loan principal. For instance, on a $200,000 loan, the closing costs will be around $4,000. If all of your money has gone to saving for a down payment, you might need help paying for closing costs.
While a few programs exist at the federal level and even with some individual lenders, the majority of down payment help is offered at the local level through state, county and city government programs, and come in the form of a loan or grants.
Types of down payment assistance
There are four usual types of down payment assistance.
- Grants: Grants are a type of housing assistance that provides a one-time cash sum to cover all or part of a down payment or closing costs. The funds don’t have to be repaid.
- Low-interest loans: These are similar to grants, but they must be repaid, usually over the course of a few years.
- Deferred-payment loans: These types of loans generally don’t charge interest, but usually need to be repaid in full as part of later home financing transactions. For instance, when you sell or refinance your home, you might need to repay the loan. Many times, these are zero-interest loans, which means you are only responsible for repaying the amount you borrowed initially.
- Forgivable loans: These are similar to the other kinds of assistance, but you might never have to pay them off. Generally, forgivable loan debt is erased after a certain period of time so long as you still own the home and are up-to-date on your mortgage payments.
Some mortgage lenders offer their own down payment assistance. For example, Chase offers up to $3,000 that can go toward closing costs and down payment needs. While this program is not just for first-time homebuyers, it does have other stipulations. You will need to get a 30-year fixed-rate home loan and you are required to make the home your primary residence. You will also need to attend a homebuyer education course to receive the full amount.
Who is eligible for down payment assistance?
The vast majority of down payment assistance is offered to first-time homebuyers. Many cities and counties have other housing programs available, but down payment assistance is typically reserved for those who have not owned a home in the last three years.
Many programs restrict owners of rental or investment properties from participating, so you will need to be a first-time homebuyer and the home should be your primary residence. If you are unsure if you qualify, contact the program before you apply.
What mortgages can down payment assistance be applied to?
Down payment assistance is available for all kinds of mortgages. Government-backed mortgage programs like FHA loans, VA loans and USDA loans often come with their own down payment assistance built-in. You can also apply for down payment assistance with conventional mortgages.
Individual lenders are likely to have their own requirements and restrictions when it comes to how down payment assistance is accounted for and applied to your loan. So, if you know you are planning to take advantage of a down payment assistance program, it is a good idea to talk to prospective lenders about how this will affect your mortgage.
How to find down payment assistance programs
Most payment assistance programs are local, though there may be a few statewide ones too. Some of the places to check out for down payment assistance include:
- City and county government programs: As a means to boost homeownership, many counties and cities offer down payment assistance programs for first-time homebuyers. The best place to start is an online search, but you can also speak to your loan officer to get more details about local DPA programs in your region.
- State housing finance authority: The Housing Finance Authority runs state-chartered agencies all over the country, offering payment assistance to home buyers. Visit this page to find an HFA agency in your state.
- US Department of Housing and Urban Development: Each state has different HUD programs for home buyer down payment assistance. This page on the HUD website gives detailed information about local payment assistance programs.
- HUD-approved housing counselors: When you need down payment assistance but do not know where to start, it is the right choice to seek the help of a housing counselor. Every state has HUD-approved counselors who will simplify the finer points of home buying and help you find financial assistance.
- Government-sponsored enterprises: Fannie Mae and Freddie Mac are two GSEs offering programs that let mortgage lenders accept loans from housing assistance programs. Speak to your lender to find out if they use any of these programs and if you are a good fit.
- Down payment resource: This technology company provides a bouquet of resources for home buyers, realtors, and lenders. Visit this page to learn more about their resources and to find out if you qualify for a DPA program.
How to apply for down payment assistance
There is no shortage of down payment assistance options, but there is also no universal application that will go to all of them. Because of this, you will need to apply to each one individually. Depending on the program, you might call to see if you are eligible, complete the application online or in-person, and possibly take certain education courses.
Some programs require you to have a specific loan to qualify. For instance, you might need an FHA loan instead of a conventional loan.
Aside from being a first-time homebuyer, eligibility is usually based on income. Many programs target low- to moderate-income earners, so if you are in a higher bracket, you might not qualify. You might also need to contribute a certain percentage of your own income to get the assistance.
Pros and cons of down payment assistance programs
There are a lot of benefits to receiving down payment assistance, but it is not all upside. Here are some key things to keep in mind.
- Can help you reach homeownership faster
- Can save you money upfront
- Can help you afford more house or get more favorable loan terms
- Can cost you more in the long run if your down payment assistance comes in the form of an interest-bearing loan
- Can be time-consuming due to the amount of down payment assistance available; you’ll need to do your research and apply to each one individually
- Not everyone qualifies
- You need to be even more careful about sticking to your budget and refrain from using down payment assistance to overextend yourself financially
Alternative forms of down payment assistance
Not everyone qualifies for down payment assistance programs. If you have owned a home in the last three years, your income is too high or you are planning to rent out the property or otherwise use it as an investment, you might not qualify for many programs.
However, there are other housing programs you might qualify for. Visit HUD.gov, select your state and then on “Learn about homeownership.” From there, you will learn about ways to avoid foreclosure, find home counseling services and get money for home renovations or repairs. Depending on where you live and your needs, you might find housing resources geared towards seniors, disaster relief and help to pay utility bills.
Home assistance programs are vast and vary by needs and location. You might find that if you do not qualify for down payment assistance, you might be eligible for assistance in other ways.