Becoming a homeowner is a major financial commitment, and making the down payment is arguably the biggest obstacle. Saving a lump sum of cash – and then parting with it – is never easy. Even a modest down payment can mean paying tens of thousands of dollars up front. Loans backed by the Federal Housing Administration (FHA) are geared to help first-time or low-income buyers enter the housing market, and they are usually offered with relaxed borrowing requirements like lower credit score and income thresholds. But even with less stringent qualifications, FHA loans typically require at least 3.5% – and sometimes 10% – of the home’s sale price up front.
Whether you prefer to hold on to more savings or you don’t have the upfront amount, down payment assistance can be a less stressful way to unlock the door to the housing market. While down payment assistance isn’t offered through the FHA – it’s typically administered through state, local and nonprofit agencies – these programs can be used in conjunction with FHA loans.
There are many down payment assistance programs out there, and no two work exactly the same way. Plus, not all lenders will work with every program. So, it’s important to learn how various programs work at the start and, of course, how to qualify.
Key Takeaways:
- FHA loans require a down payment of 3.5% or 10%, depending on your credit score.
- Down payment assistance can help eligible home buyers meet those requirements more quickly.
- Down payment assistance programs usually come with income and credit requirements.
- There are a variety of programs, from grants to deferred loans, and each one has its own rules and requirements.
- Not all lenders are open to down payment assistance.
- Understanding from the start the terms and conditions of any assistance, such as repayment and residency requirements, is critical.
Down Payment Assistance Alongside FHA Loans
An FHA loan is a type of mortgage backed by the Federal Housing Administration. The FHA insures the loan for the lender, so if a borrower defaults, the bank still gets paid. As a result, lenders allow home buyers to qualify with less stringent credit requirements – usually a lower credit score, a higher debt-to-income ratio, and a down payment as low as 3.5% with a 580 credit score. With a score of 500-579, borrowers need 10% down.
While the FHA’s flexible requirements make it easier for many borrowers to get approved for a loan, you’re still on the hook for at least 3.5% up front. On a $350,000 home loan, that’s $12,250. With a 10% down payment requirement, that increases to $35,000.
What Is Down Payment Assistance?
Down payment assistance helps you cover some or all of the costs of a down payment on a house. Sometimes you can use it to cover closing costs as well. While the FHA offers home loans, it doesn’t offer down payment assistance. Different types of organizations and government agencies offer down payment help, often in the form of grants and loans, and these outside programs can be used in conjunction with an FHA loan.
To qualify for help with a down payment, you’ll need to meet each program’s eligibility requirements. Often this includes certain income and credit requirements for the borrower, some of which may exceed the borrowing standards on your FHA loan. You may also need to be a first-time home buyer. Additionally, the property you’re buying may need to meet certain criteria, such as a maximum sale price.
Some typical requirements include:
- Certain programs may be open to first-time buyers only (defined as not owning a principal residence in the last 3 years).
- Your income may have to be within certain limits.
- It’s necessary to have a credit score of at least 620 (higher than an FHA loan).
- Your debt-to-income ratio (DTI) can’t exceed 50%.
- You must occupy your home as a primary residence.
- You may have to complete mandated home buying education.
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Types of Down Payment Assistance To Use With FHA Loans
Down payment assistance programs are run by various government agencies, state housing authorities and nonprofit organizations. They come in many forms, and each program works differently. Your bank may not accept all of these programs, so talk to your mortgage lender about the assistance you’re considering before committing. As you search for down payment assistance, consider the following types of programs.
Grants
When you receive a down payment assistance grant, it’s essentially getting money that you never have to pay back. Along with your down payment, you may be able to apply a grant to your closing costs. Either way, it’s a financial benefit when buying a home. However, most grants come with strict eligibility requirements, such as being a first-time home buyer, meeting certain income limits and purchasing a home under a certain sales price. Research different options available in your area to see if you qualify. Start with FHA & Housing Resources to learn more.
Loans
Some down payment assistance programs for FHA loans and other mortgages come in the form of loans. While it may seem counterintuitive to take out a down payment loan on top of your mortgage, this type of down payment financing usually comes with low interest rates and deferred or forgivable payments, so it really helps.
Here are some examples:
- Forgivable loans: The loan amount may be forgiven if you meet certain criteria, like living in the house for a specific amount of time (typically 2 – 5 years). If you sell your home before the “forgiveness” period is up, you may have to pay back the loan in full.
- Low-interest loans: They allow you to borrow money for your down payment at an interest rate that’s lower than your mortgage. You will have to repay low-interest loans – so you’ll have another loan payment on top of your mortgage each month – but you can repay them gradually.
- Deferred payment loans: You will have to repay this loan, but not while you live in the home. Instead, you pay off the loan when you sell or refinance the property or pay off the mortgage in full.
Individual Development Accounts (IDAs)
An individual development account (IDA), or matched savings program, is a special savings account designed to help low-income individuals build savings. You’ll make deposits into an account and a donor (financial institution or government agency) will then match them up to a limit. They’re usually run by nonprofit organizations and funded by agencies like Temporary Assistance for Needy Families (TANF), governments, private foundations or corporate grants. Lenders don’t always accept matched savings as a source of down payment, so be aware of that when shopping for your loan.
To qualify, you must meet certain criteria regarding income, assets and employment, and participate in financial education programs. Since many states fund IDAs through TANF dollars, begin your search for an IDA program by visiting the Administration for Children and Families at acf.gov/ofa/map/help-families and selecting your state.
Employer-Sponsored Assistance
Check to see if your employer offers down payment assistance as a benefit. There are a few different ways down payment assistance could be structured, including:
- Your employer contributes to a down payment fund.
- Your employer pays for Mortgage Insurance Premium (MIP).
- Your employer covers an interest rate buy-down.
Your HR department can connect you with available programs at your company.
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Where To Find FHA Loan Down Payment Assistance
How do you find help with an FHA down payment? Start here to make sure you don’t miss out on any available assistance.
County, City And State Programs
Although an FHA loan is backed by the federal government, many down payment assistance programs are offered by local or state government agencies. Many local government agencies offer grants or second-lien loans to qualified buyers. Look at the area where you want to buy a home, and check with housing authorities and other agencies. Just note that you may need to work specifically with a lender that accepts this type of down payment assistance. Not all lenders do.
Mortgage Lenders
Some lenders have their own down payment assistance programs that may accompany an FHA loan. You may also find similar assistance for closing costs. These loans are separate from your mortgage and will add to your DTI. In addition to online lenders, you may find programs at banks or credit unions. However, these programs may require you to use a specific type of home loan and meet certain income requirements.
Real Estate Agents
Real estate agents are another good resource for finding local down payment assistance programs. Plus, they often have advice on how to qualify, especially if the property needs to meet any specific requirements.
HUD Directory
The Department of Housing and Urban Development (HUD) has an online directory of nonprofit organizations providing down payment assistance. You can filter results to include those that accept FHA borrowers, as well as by city and state.
Gift Funds
FHA loans allow you to use gift funds for the down payment and closing costs. Gift fund sources may include:
- Family members
- Employer
- Labor union
- Close friend
- Charitable organization
- Government agency
The money has to be a gift – a handout that doesn’t have to be repaid – in order to qualify.
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The Bottom Line: Speed Up Home Buying With FHA Loans And Down Payment Assistance
Many down payment assistance programs can be used alongside FHA loans, though few are limited exclusively to use with FHA loans. Explore all of the options available in your area so you don’t leave money on the table. Just make sure you fully understand the obligations regarding any program you’re considering, as well as whether your lender will accept it.
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Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
