Down Payment Assistance: What It Is, How It Works And How To Find A Program For You
There are many steps to buying a home, but coming up with a down payment can be the biggest obstacle. For some buyers who would otherwise be able to comfortably afford the monthly payment, a down payment could be what’s stopping them from purchasing a home. Down payment assistance may be able to help provide relief.
What Is A Down Payment Assistance Program?
Down payment assistance (DPA) is funding that’s intended to help with the down payment and closing costs on a home purchase. The programs are run by entities as varied as nonprofits, state and local housing finance agencies, municipalities and lenders themselves, helping potential home buyers circumvent one of the biggest impediments to homeownership.
Three of the most common forms of down payment assistance include grants, deferred payment loans and forgivable loans. Others include low-interest loans, mortgage lender offerings, Individual Development Accounts (IDAs) and matched savings programs.
How Does Down Payment Assistance Work?
Down payment assistance programs are intended to help qualified homeowners with a down payment and/or closing costs. To get it, you need to apply for and have your application approved by the entity offering the assistance. It’s not uncommon for the provider to require much of the same information that would be necessary to qualify for a mortgage.
The particulars depend on the program. Some assistance doesn’t need to be paid back at all, while other assistance takes the form of a loan that either definitely needs to be paid back or is repaid under certain circumstances. Additionally, not all mortgage lenders accept all forms of assistance. It’s important to be sure that the lender will take the assistance you’re getting.
Speaking generally, your options in terms of shopping around can be more limited if the assistance requires that you work with a participating lender. Lenders are also often reluctant to allow assistance when the terms require that the providing entity has the primary lien. This prevents the mortgage lender from being paid first if the client defaults on the mortgage.
On the other hand, if the lender accepts the assistance, this could allow you to have the funds necessary to pay the down payment or closing costs – making it possible to afford a home. The assistance could also help you make a higher down payment, which can allow you to get a lower rate and potentially avoid paying for private mortgage insurance (PMI).
Types Of Down Payment Assistance Grants and Programs
When it comes to DPA, there are many options. Given the wide variation in terms, it’s very important to understand what you’re getting before accepting assistance. The following programs represent the types of choices available to you.
Grants are generally considered the most desirable type of assistance because they don’t have to be paid back at all. Lenders generally accept any grant as long as the program wasn’t specifically designed to only apply to the person receiving the assistance. However, lenders may have restrictions on how the property is occupied.
Forgivable loans are those that don’t need to be repaid if you meet certain conditions. As an example, you might have to live in the home as your primary residence for a period of time. If you’re getting employer assistance, you may be required to stay with the employer for a number of years.
Like the other loan options we’ll talk about, forgivable loans are usually enforced through a secondary lien on the home. If you don’t meet the conditions for forgiveness, the repayment terms are triggered.
Deferred Payment Loans
Deferred payment loans can take a couple of different forms. One of the more common structures is that the assistance doesn’t have to be repaid until the home is sold, refinanced or otherwise paid off.
In other situations, the payments are delayed for some time before starting at a later date. Lenders may have requirements that the payments be fixed on a monthly basis and fully amortized, meaning there’s no balloon payment at the end.
Depending on the length of deferment, lenders may or may not include the payment in your debt-to-income ratio (DTI). This can impact the loan amount your lender will qualify you for.
Low-interest loans are similar to deferred payment loans. The difference is that the repayment starts immediately after you close on your loan. For that reason, the payment is included in your DTI. These loans may come from traditional DPA providers or financial institutions.
Mortgage Lender Programs
Mortgage lenders may have their own down payment assistance options. Typically, these are tied into specific loan products. They often require the buyer to contribute a certain percentage of the purchase price with the lender contributing the remaining amount.
In addition to the traditional underwriting requirements to qualify for the mortgage loan, you may be required to come in under certain income limits and/or be a first-time home buyer.
Individual Development Accounts (IDAs)
Individual Development Accounts are typically put in place by states in order to create matching funding programs to help low-income individuals and families achieve independence through vehicles such as homeownership. The idea is that the state or participating institutions contribute on a dollar-for-dollar basis up to a certain amount to supercharge savings.
Matched Savings Programs
While having the same structure as IDAs, financial institutions may also have their own matched savings programs that aren’t supported by any state or federal funding. Speak with your financial institution about their offerings.
Down Payment Assistance Program Requirements
Every down payment assistance program is going to have its own requirements. Some are specifically first-time home buyer assistance programs. Others are targeted at low-income home buyers or the middle class. Still others require that you live in a certain location.
The most common type of DPA program is aimed at first-time home buyers. Although the definition may seem self-explanatory, this is actually open to more people than you might think. The following are common requirements to qualify as a first-time home buyer:
- You haven’t owned any interest in residential property in the 3 years prior to your closing date.
- You’ll be occupying the property as your primary residence.
- You’ll be moving in within 60 days of your closing date.
Depending on the terms of the DPA program, the 3-year waiting period may be waived if you’re a single parent with full or joint custody of at least one child. You may also not have to wait if you were a displaced homemaker, defined as someone unemployed, having part-time or inconsistent employment prior to the divorce or separation from their spouse.
If the program follows FHA first-time home buyer requirements, you may be able to avoid waiting if you’ve only owned a primary residence that wasn’t affixed to a permanent foundation. You also qualify if you’ve only owned a property that wasn’t in compliance with applicable building codes and it would cost more to make it compliant than it would to buy a new home.
Of course, you have to meet the requirements of your lender and the down payment assistance provider in terms of credit score and income.
Finding Down Payment Assistance Programs And Grants
Down payment assistance can come from many sources. Here’s a list of possible leads on where to find DPA:
- Department of Housing and Urban Development (HUD): HUD is best known to many as the home of the Federal Housing Administration (FHA), which administers FHA loans ideal for those who want a low down payment option but may have a few dings on their credit. They also have a directory of local home buying programs, including DPA.
- Housing finance agencies: States and certain larger local cities may have their own housing finance authorities. These can be great sources for state-supported programs.
- Municipalities: Regardless of whether they do so through a housing finance agency or otherwise, municipalities often have their own housing support programs in one form or another.
- Housing-focused nonprofits: Nonprofits focused on housing are also good places to look for grants and other forms of DPA.
- Down payment assistance programs for specific groups: There are also DPA programs intended to help people in specific occupations. An example of this is the Teacher Next Door However, there are also programs for other school employees, nurses and healthcare professionals, law enforcement and other first responders as well as government employees, active-duty military and veterans, to name a few.
What Types Of Loans Allow Down Payment Assistance Grants Or Programs?
Generally speaking, the major mortgage investors (Fannie Mae, Freddie Mac, FHA, VA, etc.) allow down payment assistance, whether through grants or loans. The thing to really watch out for is whether the lender has to be approved or the down payment assistance has to be the first lien. If that’s the case, many lenders don’t accept those programs. Speak with your lender to learn more.
Now that we’ve gone through all the basics, it’s time to touch on some other questions that might still be rattling around in the back of your mind.
Do you have to pay back down payment assistance?
This is dependent on the type of assistance. Grants are typically the most desirable. Again, that's because these are free money. You never have to repay a down payment grant. The challenge is qualifying for a grant. You typically must meet income requirements, meaning that your yearly income can’t be too high.
Other loans may be forgivable under certain circumstances or the payments may be deferred. Be sure to speak with your DPA provider.
Is there FHA down payment assistance?
The FHA itself doesn’t offer down payment assistance. However, you can use down payment assistance from a third-party entity or your lender to make the down payment and pay closing costs. Please be aware that if you have to pay back your down payment assistance, this may be included in your DTI.
Can you use multiple down payment assistance programs?
You can use multiple down payment assistance programs as long as the terms of any of the down payment assistance you receive don’t prohibit using DPA from other sources. Remember, not all lenders accept all DPA programs.
Are down payment assistance programs worth it?
Generally, down payment assistance is going to be worth it. It could mean the difference between being able to afford a house and not. In other cases, you might use the boost to avoid paying PMI. You just have to know whether the lender is going to accept it and under what circumstances you might have to pay it back.
The Bottom Line
Down payment assistance programs provide funds that can be used by home buyers to help with down payment and closing costs on a home, which are often the biggest roadblocks. There are many types of DPA including grants, deferred loans, forgivable loans and loans that are immediately repayable.
Not all lenders accept all forms of down payment assistance. DPA requiring a lender to be approved or with first lien restrictions is likely to limit your options if you’re shopping around. Many assistance options are targeted at first-time home buyers, but there are options available for specific groups and those who stay under certain income thresholds.
If you’re feeling confident, you can apply for a mortgage. Your lender will be able to help you understand potential down payment assistance options.