Buying a home is usually the most expensive purchase a person makes in their lifetime. Your down payment is essential to not only securing a loan for your home, but also getting one with a low interest rate and manageable monthly payments.
Not everyone has the financial means to put 20 percent down — 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.
Here are some places to look for down payment assistance.
How do down payment assistance programs work?
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.
- 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’re 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 towards closing costs and down payment needs. While this program isn’t just for first-time homebuyers, it does have other stipulations. You’ll need to get a 30-year fixed-rate home loan and you’re required to make the home your primary residence. You’ll also need to attend a homebuyer education course to receive the full amount.
Down payment assistance can potentially give you money that can help you afford a down payment, or it can help with closing costs. Closing costs are fees and charges you pay when you finalize your mortgage that total roughly 2 percent to 5 percent of the loan principal. On a $200,000 loan, that will mean at least $4,000 in closing costs. If all of your money has gone to saving for a down payment, you might need help paying for closing costs.
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’ll need to be a first-time homebuyer and the home should be your primary residence. If you’re unsure if you qualify, contact the program before applying.
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, whether or not they’re sold to Fannie Mae or Freddie Mac.
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’re planning to take advantage of a down payment assistance program, it’s a good idea to talk to prospective lenders about how this will affect your mortgage.
How to apply for down payment assistance
There’s no shortage of down payment assistance options, but there’s no universal application that will go to all of them. Because of this, you’ll need to apply to each one individually. Depending on the program, you might call to see if you’re 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’re 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’s 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’ve owned a home in the last three years, your income is too high or you’re planning to rent out the property you’re purchasing, 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’ll learn about ways to avoid foreclosure, find home counseling services and getting 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 don’t qualify for down payment assistance, you might be eligible for assistance in other ways.