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Down Payment Assistance: A Complete Guide

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Published on December 7, 2021
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Coming up with the money for a down payment is one of the bigger hurdles that home buyers, especially first-time ones, face when buying a home and applying for a mortgage. Just consider these figures: A down payment of 20% for a home with a final purchase price of $220,000 comes out to $44,000 – a lot of money for buyers to scrape together.

But there is good news. Not all mortgage loans require down payments of 20%. Most, in fact, don’t. You can qualify for conventional and government-insured loans with down payments of 3.5% or 3% of a home’s purchase price, which significantly lowers the amount of cash you’ll need. You might even qualify for a mortgage that requires no down payment at all.

But what if a smaller down payment is still a financial challenge? Again, there is good news: states, non-profit organizations and lenders offer several down payment assistance programs that can help cover the cost of whatever down payment you need. And these programs could be the key to getting into a home of your own.

What Is Down Payment Assistance?

If you are struggling with coming up with enough money to cover your new home’s down payment – particularly if you’re a first-time home buyer who needs assistance – don’t panic. With the help of down payment assistance programs, you might still be able to get into a new home.

Down payment assistance is any program or funding option that makes it easier for homebuyers to collect the funds they need for a down payment. Both government and public agencies provide these programs, often in the forms of grants. In many cases, the government agencies and public groups will either waive down payment requirements or provide the funds to cover them on their own.

In most cases, you'll need to meet certain income requirements to qualify for this assistance. You might also need to promise to live in your home for a certain number of years.

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How Does Down Payment Assistance Work?

There are several types of down payment assistance programs that could help you get into a home. If you are interested in any of these programs, be sure to ask your lender how they work and whether you qualify for them. Your lender should be well-versed in how down payment programs operate. Here’s a quick overview of how three common types of down payment assistance work:

Grants: Grants are especially attractive because you don't have to pay them back. The money you receive through a down payment grant, then, is free money. Say you need $20,000 for your down payment. A grant program might gift you the entire $20,000 – money you won't have to repay. Other programs might grant you only part of the funds. If you receive a grant for $15,000, and your down payment is $20,000, you'd still have to come up with $5,000 to cover the rest of your down payment.

Forgivable loans: Forgivable loans – often with 0% interest – are another attractive down payment assistance option. Under these programs, you won't have to pay back your loan if you meet certain conditions. These conditions will vary depending on the loan type, but you might have to agree to live in your new home for a certain number of years or work in a specific profession for a set number of years. You can use the loan dollars to cover your down payment.

Deferred-payment loans - Deferred-payment loans aren't quite as attractive as grants or forgivable loans because you will have to pay them back. But these loans often come with 0% interest – which means you won't have to worry about covering any interest costs – and often don't need to be paid back until several years until after you've borrowed the money. This gives you a chance to get settled into your new home and build up savings before having to pay back your loan.

Down Payment Assistance Programs

What type of down payment assistance is right for you? Here’s a look at your options. Before applying for assistance, though, consult with your mortgage lender. Your lender can help you decide which assistance option best fits your financial needs.

Down Payment Assistance Grants

Down payment assistance grants are the best option for homeowners looking for help in coming up with down payment funds. 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 – or promise to live in a home for a certain number of years or work in a certain profession, like teaching or law enforcement.

Non-profit organizations, employers or local housing agencies typically offer these grants. Ask your mortgage lender if you might qualify for one of these grant programs.

Down Payment Assistance Loans

You might also qualify for a forgivable loan that you can use to cover your down payment. Once you close such a loan, you’d receive payment in a lump sum that you would then use to pay your down payment. You won’t have to repay this loan if you meet the specific requirements of it.

The key is to understand these requirements and to make sure you can meet them. For instance, you might have to agree to live in your home for at least five years. If you move earlier, you’ll have to pay back your forgivable loan. If you don’t, you won’t. Other forgivable loans might require you to work a certain number of years in a specific profession, such as teaching. If you leave this profession too early, you’ll have to repay the loan. Before signing up for a forgivable down payment loan, make sure you can meet its requirements.

You might also qualify for government-insured loans that require no down payments. The most common of these are loans insured by the U.S. Department of Veterans Affairs, known as VA loans, and U.S. Department of Agriculture, better known as USDA loans. Both of these loans require no down payments, but you’ll have to meet certain requirements. For a VA loan, you must be an active member of the U.S. military, a veteran of the Armed Forces or the widowed, non-remarried spouse of a service member. For USDA loans, you must buy a house in a part of the country defined as rural by the U.S. Department of Agriculture.

Good Neighbor Next Door

The Good Neighbor Next Door program is available to law enforcement officers, pre-k to 12th-grade teachers, firefighters and emergency medical technicians. If you live in a Department of Housing and Urban Development revitalization area, you’re eligible for a 50% discount on eligible HUD listings in your state.

HUD listings are homes that were originally financed with loans insured by the Federal Housing Administration. If the owners of these homes stop making mortgage payments and they fall into foreclosure, the homes are then resold as HUD properties.

The Good Neighbor Next Door 50% discount is in the form of a silent second mortgage. As long as you live in the property for at least 3 years, you won’t have to pay any interest or payments on this second mortgage.

If you buy a home through this program, you'll only have to come up with a minimum down payment of $100. That's a big difference from the minimum down payment of 3.5% of a home's final purchase price that most FHA-insured loans require.

HUD Home Buyer Programs

If you’re looking for down payment assistance programs, a good place to start is through HUD.

The U.S. Department of Housing and Urban Development offers the most comprehensive list of down payment assistance programs across the country. Simply visit HUD’s online listing of programs and search for your state.

Remember that these are just a list of assistance programs. You’ll have to determine if any of these programs are right for you and if you qualify for them.

Chenoa Fund

The Chenoa Fund is offered by CBC Mortgage Agency, a tribally owned chartered housing finance agency. The fund provides down payment assistance to low- to moderate-income homebuyers across the country, except for those in New York state.

The assistance comes in the form of a forgivable second mortgage loan with 0% interest that you can use to cover your down payment costs. Depending on the size of your down payment, this loan will be forgiven if you make 36 or 120 consecutive on-time payments on your primary mortgage loan.

To qualify for this assistance on FHA loans, you'll need a minimum FICO credit score of 600 and meet income requirements. To qualify for Chenoa Fund down payment assistance on a conventional mortgage loan – one not insured by a government agency – you'll need a minimum FICO credit score of 620.

Down Payment Assistance Qualifications

Down payment assistance isn’t open to every home buyer. Buyers typically need to meet certain requirements to qualify for assistance programs offered by nonprofits, government agencies or lenders.

These requirements vary, but some down payment assistance programs are open only to first-time home buyers. Others require that you buy a home in a specific location, such as a city or neighborhood that needs more homeowners. Still other programs are only open to buyers with low or moderate incomes. You might also need a certain credit score to qualify for a down payment assistance program, usually a score that is at least in the low 600s.

You'll also want to make sure that the down payment assistance program you're looking at is accepted by your lender. Here's more information on down payment assistance accepted by Rocket Mortgage®.

The Bottom Line: It’s Normal To Need Down Payment Assistance

Don’t worry if you need help gathering the funds for a down payment. It’s not unusual for buyers, especially those purchasing their first home, to need this help. As home prices continue to rise, the amount buyers need for down payments increases, too.

If you need down payment assistance, talk to your mortgage lender. Lenders will know what assistance programs are available in your area and whether you might qualify for any of them.

If you want more information on the mortgage process and down payments, check out our story on the steps to buying a house.

A Final Word On Down Payment Assistance

Saving for a down payment certainly isn’t easy. Indeed, there are many steps to the home buying process before you get the keys. However, the support of down payment assistance, along with knowing what to expect, can help make homeownership a reality for first-time home buyers and many others.

If you’re ready to get started, you can apply online with Rocket Mortgage® or give one of our Home Loan Experts a call at (800) 785-4788.

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Dan Rafter

Dan Rafter has been writing about personal finance for more than 15 years. He's written for publications ranging from the Chicago Tribune and Washington Post to Wise Bread, RocketMortgage.com and RocketHQ.com.