Pros And Cons Of Down Payment Assistance
Down payment assistance programs provide grants or loans to help people afford the upfront costs of buying a home. Such aid can help you buy a home sooner, but it’s important to understand how these programs work – and their potential drawbacks – before you apply.
Key Takeaways:
- Down payment assistance programs help home buyers afford the down payment on a house through grants or various types of loans.
- Assistance can help buyers buy a home sooner, make a large enough down payment to avoid PMI or qualify for a lower interest rate.
- However, not all lenders accept all assistance plans, you may pay more over the life of your loan, and there you may need to live in the home for a specific number of years.
What Is Down Payment Assistance?
Down payment assistance usually is a grant or loan that first-time or low-income buyers can use to afford the upfront costs of buying a home. Most plans are operated by local governments or nonprofit groups and provide assistance buyers can put toward a down payment or closing costs.
Types Of Down Payment Assistance
Most down payment assistance comes in one of the following types:
- Grants. Grants are essentially cash gifts and don’t have to be repaid.
- Forgivable loans. A forgivable loan doesn’t have to be repaid if you meet specific conditions. Usually, if you live in the home for a certain number of years, you won’t have to repay the loan. Forgivable loans usually are interest-free.
- Deferred payment loans. A second mortgage loan you don’t have to make payments on but do repay when you move out of the home, sell it, or refinance your mortgage. These loans also typically charge no interest.
- Low-interest loans. Some down payment assistance programs offer simple loans, often with subsidized interest rates, that you take out at the same time as your primary mortgage.
- Matched savings programs. These programs match the amount you save in some way. The matched amount can be used only for the intended purpose, but you don’t need to repay it.
How Much Can You Get With Down Payment Assistance?
How much you can get in down payment assistance varies significantly. Every program has its own rules and assistance limits. In many cases, it will depend on the cost of housing in your area. The best way to find out how much you can get is to research programs in your area.
Who Can Get Down Payment Assistance?
Down payment assistance programs usually are for low-income or first-time home buyers – usually defined as someone who hasn’t owned a home in the past three years – but every program is different.
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Pros Of Down Payment Assistance
The key benefit of down payment assistance programs is that they make homeownership more affordable more quickly. Here are some more specific benefits:
Grants Don’t Have To Be Repaid
Grants are the best type of down payment assistance because you don’t have to repay them. It’s like getting free money that you can use to buy a house, leaving you free to use your savings for other expenses.
You Can Buy A Home Sooner
Most mortgages require a minimum down payment. Down payment assistance can help you meet that minimum more quickly, which means you can buy a home sooner rather than later.
You May Avoid PMI
You can buy a home with a conventional loan and a down payment of less than 20%, but the lender will require you to pay for private mortgage insurance. This policy protects the lender if you default on your loan, and you have to pay it until you have 20% equity in your home. If down payment assistance helps you make a large enough down payment, you can avoid the monthly expense of PMI.
You May Get A Lower Interest Rate
A larger down payment reduces the lender’s risk in approving your loan. That means your lender may offer you a lower interest rate that can save you thousands over the life of your loan.
You Could Have Savings Left Over After Closing
If you already have money saved, a grant or loan to pay for your down payment could help you avoid depleting your savings entirely and leave you with some left over after closing.
What’s Your Goal?
Home Purchase
Home Refinance
Tap Into Equity
Cons Of Down Payment Assistance
While down payment assistance can be a boon to aspiring home buyers, it also has drawbacks to consider.
Not All Lenders Accept All Assistance Programs
Some mortgage lenders may not accept certain types of down payment assistance. If a lender is already on the fence about approving your loan application, needing outside help to afford the down payment may not reassure them you can afford the loan.
You May Pay More Over Time
Some types of down payment assistance could cost you more down the road. For example, if you get a deferred payment loan, you’ll have to pay it back when you move. Even a low-interest loan requires monthly payments that will squeeze your monthly budget.
You May Not Qualify
Not everyone can qualify for down payment assistance. Many programs apply only to first-time buyers, so if you already own a home, you might struggle to find assistance to buy a new home.
You Can Overextend Yourself
Down payment assistance could help you purchase a more expensive home, but that isn’t necessarily a good thing.
Imagine you want to make a 3.5% down payment and have saved $15,000. That means you could buy a home worth $428,571. You’d take on a $413,571 loan, which would cost you $2,682 per month at 6.75% interest.
If you get $10,000 in down payment assistance, you’d have $25,000 available. Assuming a minimum down payment of 3.5%, you can buy a home worth as much as $714,285. That would mean taking on a loan of $689,285, which would push your monthly payment to $4,471, assuming the same 6.75% interest rate.
If you’re already struggling to save for a down payment, you might struggle to handle a payment that’s about $1,800 more each month.
Closing May Take Longer
Closing on a home takes, on average, about 50 days. Getting down payment assistance can complicate the process. You may have to wait for the down payment assistance to come in, for underwriting on a second loan, or for your lender to do additional underwriting on your loan application.
You May Have Occupancy Requirements
Some forms of down payment assistance are only available to homeowners who plan to live in the home. For example, many forgivable loans require that you live in the home for a specific number of years. If you move, sell, or refinance before that period ends, you’ll have to pay back the amount you borrowed rather than have it forgiven.
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FAQ
Here are answers to common questions about the pros and cons of down payment assistance.
Different down payment assistance programs have different funding timelines. You can expect it to take weeks, if not months, from the time you apply.
Yes, you can qualify for and take advantage of more than one down payment assistance program. Keep in mind that if you’re getting loan assistance, it may affect your ability to qualify for a mortgage, so be sure to work closely with your lender.
Down payment assistance is well worth looking into. In the best case, you can get free money to put toward purchasing a home. In the worst case, you can’t find help and will need to fund the down payment on your own.
If you get down payment assistance in the form of a loan, that lender has a lien on your home. That loan is a second mortgage, and you must disclose that to your primary mortgage lender. If you don’t disclose the second mortgage, it is a silent second mortgage, which is illegal. You could be prosecuted, or your primary lender could foreclose on your home.
The Bottom Line
Down payment assistance programs can help home buyers afford a home sooner than they would otherwise, help them buy a more expensive home, or help them have more money left after closing to use for other purposes. If you’re in the market for a home, take the time to look for down payment assistance programs in your area. You could get some extra cash to buy your home, and the worst-case scenario is that you wind up back where you started with no damage done.
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