How To Get Down Payment Assistance – A Home Buyer’s Guide
Saving enough for a down payment and closing costs is a big roadblock for most aspiring home buyers. The good news is that there are plenty of down payment assistance programs that can defray those costs. But making sure you’re eligible and then submitting a successful application only adds to the long list of tasks required to buy a home. Understanding how assistance programs work before you start shopping for a home can prepare you for the process and help set you up for success.
Key Takeaways:
- Down payment assistance programs offer grants, deferred payment loans, forgivable loans and other forms of financial help for home buyers to afford a down payment and closing costs.
- Requirements for getting down payment assistance include being a first-time home buyer, living in the home you buy for a specific time, and meeting maximum income levels.
- You can find down payment assistance programs through local and state agencies and organizations.
How Does Down Payment Assistance Work?
Down payment assistance provides grants or loans to eligible buyers who need help to afford a down payment and closing costs on a home. State and local government agencies, nonprofits and other organizations offer DPA programs to help first-time buyers afford the sometimes daunting upfront costs required to afford a home.
Depending on your mortgage type, the minimum down payment for a single-unit primary residence is 3% to 5% of the home purchase price. That doesn’t include closing costs, which you must pay to fund your loan and transfer legal ownership of the property. Those are usually 2% to 5% of the purchase price.
Down payment assistance typically is available primarily to first-time home buyers and often is designed for low- and middle-income buyers. In addition to income requirements, DPA programs frequently have property requirements, and the aid is dependent on the buyer’s living in the home for a specific number of years. Exact eligibility requirements vary by program and the type of assistance offered.
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Types Of Down Payment Assistance Programs And Loans
Down payment assistance comes in many financial forms.
Grants
Grants don’t need to be repaid under any circumstances, making this type of assistance the most popular form of down payment assistance. Grants are usually available only to certain types of buyers. There’s usually a limit to the number of grants a program can offer, and with high demand, they can be more difficult to get than loans. Grants often have limits, such as a percentage of the purchase price up to a maximum amount.
Deferred Payment Loans
With a deferred payment loan, you don’t have to repay the principal until a later date. This most often takes the form of a no-interest second mortgage that’s repaid when you sell, refinance or pay off your home. For example, if you used a deferred payment loan of $10,000 to make a down payment, you would repay it if you sold the home using your profits from the sale, if you refinanced your mortgage by adding the loan amount to your new mortgage amount, or when you pay off your primary loan balance in full.
Forgivable Loans
Forgivable loans don’t have to be repaid if the borrower meets certain conditions. For example, many loans are forgiven if the borrower lives in the home as their primary residence for a specific number of years. If you don’t meet the terms for forgiveness, you’ll need to repay the loan.
Individual Development Accounts
Individual development accounts work like matched savings programs, with contributions to the account being matched up to a certain amount. These programs usually are run by state agencies to help low-income earners save money for specific purposes, such as buying a home. Most individual development accounts have income requirements you’ll have to meet. Even if you don’t qualify for an IDA, there may be other matched savings programs you can look into.
Low-Interest Loans
The lender you’re working with – or another institution – may offer you a second mortgage with a low interest rate to use for a down payment or closing costs. You’d pay this loan in addition to your primary mortgage payment, which means you’d have two monthly mortgage payments. The low interest rate would help make this arrangement affordable. It’s important to know that your lender may include this second loan payment in your debt-to-income ratio when deciding whether to approve your mortgage application.
Closing Cost Credits
Another alternative is to ask your lender for credits toward your closing costs. In exchange, you may have to pay a slightly higher interest rate, which may cost you more over the life of the loan than paying closing costs upfront.
Mortgage Credit Certificates
Many DPA programs offer mortgage credit certificates that give borrowers a federal tax credit equal to a portion of their interest payment up to a maximum of $2,000. While these credits don’t make money available upfront for a down payment or closing costs, reducing what you owe in taxes can make your monthly mortgage payment more affordable.
Lender-Specific Programs
Some mortgage lenders offer their own down payment assistance plans that tie in with their loan products. These programs can be open to both first-time home buyers and current homeowners.
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How To Qualify For Down Payment Assistance
Requirements for down payment assistance vary by program. These are common qualification factors.
Be A First-Time Home Buyer
Down payment assistance is usually aimed at first-time buyers because it’s typically more difficult for them to afford a down payment and closing costs.
Even if you’re not buying a home for the first time, you generally can qualify for down payment assistance as a first-time home buyer for these reasons:
- Ownership Interest. You’re considered a first-time home buyer if you haven’t owned or co-owned a residential property in the three years before your closing date.
- Single Parent. If you’re a single parent with full or joint custody of your children, you qualify as a first-time home buyer if your only previous homeownership had been jointly with a spouse.
- Displaced Homemaker. People who had previously owned a home with a spouse may be considered first-time home buyers if they were unemployed, had inconsistent employment or were employed part-time before their separation or divorce.
- Prior Residence Lacked Permanent Foundation. Some programs define a first-time home buyer using Federal Housing Administration rules. FHA considers you a first-time home buyer if your previous primary residence wasn’t attached to a permanent foundation.
- Building Code Violations. FHA regulations also consider you a first-time buyer if you’ve only owned a home that didn’t meet state, local or model building codes, and the cost to bring the home up to code is higher than it would be to construct a new residence.
Live In The Home As Your Primary Residence
DPA programs often require you to make the home you’re buying your primary residence.
Meet Income Limits
Many down payment assistance programs are targeted at low-to-moderate-income households. Your income typically will need to be less than a percentage of the federal poverty level or the area median income.
Buy In An Approved Location
Programs offered by cities, local or state housing finance agencies may require you to live in their jurisdiction to get assistance. The same is true for special-purpose credit programs supported by participating lenders or mortgage investors.
Contribute Your Own Money
Some programs require home buyers to contribute some of their own money toward the down payment and closing costs to get assistance. Depending on the terms of the assistance, this could be a flat amount or a percentage of the purchase price.
Work With An Approved Mortgage Lender
Many DPA programs require borrowers to work with an approved mortgage lender. If that’s the case, you may be limited in your ability to shop around for the best deal on a home loan. As an alternative, you may choose to search for a program that lenders are likely to accept.
Take A Home Buyer Education Course
Borrowers often are required to take a first-time home buyers class that covers how to get ready for homeownership, the steps in the home buying process, and responsibilities such as maintenance and property taxes. The program sometimes requires you to take a specific course, or you can choose one that’s certified by the Department of Housing and Urban Development.
Spend Less Than The Maximum Purchase Price
In some cases, assistance may come with a maximum purchase price. This often is a percentage of the median home price in your buying area.
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How To Apply For Down Payment Assistance
If you’re applying for down payment assistance, some of the documentation required may be similar to what you would use to apply for your mortgage application, including:
- Pay stubs
- W-2 forms
- 1099 forms
- Income tax returns
- Bank statements
Additionally, some programs may do a credit check, particularly if there’s a loan involved.
Where To Find Down Payment Assistance
Programs offering down payment assistance are common and typically can be found in every state and most counties, cities and towns. Here are some common types of DPA programs to look for:
- City and county governments. City and county governments may offer down payment assistance to qualifying home buyers looking to purchase in the area as a way of boosting local economic development.
- Housing finance agencies. Local and state governments may also maintain housing finance agencies to provide resources, including down payment assistance to home buyers living in the area.
- U.S. Department of Housing and Urban Development. HUD keeps track of state-level local home buying programs. This may help you find down payment assistance and other resources available to you in the state you’re looking to buy.
- Housing Counselors. HUD also maintains a directory of department-approved housing counselors. This could be particularly useful if the down payment assistance you’re applying for requires homeownership counseling or a first-time home buyer class.
Check for programs in your state
Here’s a rundown of state-run agencies offering down payment assistance.
FAQ
Here are answers to common questions about how to get down payment assistance.
The turnaround time for getting down payment assistance approved and funded varies by provider. To speed up the process, promptly respond to any request for information or documentation related to your application.
Minimum credit score requirements will vary from program to program, but typically, you need a credit score of at least 620.
Although the FHA doesn’t offer down payment assistance, you can use assistance from other sources with an FHA loan. FHA’s down payment requirements depend on your credit score. If your qualifying score is 500 to 579, the minimum down payment is 10%. It’s 3.5% if your score is 580 or higher.
This varies by program and the type of assistance you’re applying for. Mortgage lenders typically don’t limit how much assistance can be used for the down payment or closing costs. Sometimes, the mortgage lender or down payment assistance provider may require you to make a minimum contribution.
In general, you can use multiple sources of down payment assistance. The exception would be if the terms of any assistance program you’re using prohibit assistance from another source.
The Bottom Line
When it comes to getting down payment assistance, applying involves much of the same documentation you would use to apply for a mortgage. It can come in many forms, including grants, deferred payment loans and forgivable loans. Common sources of down payment assistance include nonprofits, state and local housing finance agencies, and employers. Every program has different requirements. Frequent criteria include being a first-time home buyer, meeting income limits and taking a first-time home buyer class.
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Rory Arnold contributed to the reporting of this article.
