Down payment assistance programs and grants
Of all the expenses that come with locking down a mortgage, making a sizeable down payment presents the biggest challenge to would-be home buyers. Many lenders require a substantial down payment — sometimes as much as 20% of the sales price — to get the mortgage process off on the right foot.
With even a modest home loan, your down payment could easily run you tens of thousands of dollars. Saving up that kind of money may seem insurmountable, but there are a number of down payment assistance programs that can lend a helping hand.
Before you write off the possibility of homeownership, take a look at the many down payment assistance programs and grants that could help you realize your dream of buying a house.
What is down payment assistance?
Down payments are often the largest obstacle to homeownership. But the federal, state and local governments — along with mortgage lenders, banks, nonprofits and other organizations — have taken steps to make it easier for more people to afford a new home.
Down payment assistance defined
Down payment assistance — sometimes abbreviated as DPA — refers to a number of programs and grants that help home buyers afford the cost of a down payment. Down payment grants may cover the entire cost or simply a portion of it — but rest-assured there are plenty of options to choose from that can fit your needs.
If you focus your search on government down payment assistance programs, know that there are many different programs available across the federal, state and local levels.
How do down payment assistance programs work?
Down payment assistance programs are usually accessible to anyone buying a home for the first time. Some programs may even limit eligibility to first-time home buyers. Depending on your location and qualifications, you may be eligible for a number of loans and grants to help you bridge the gap to homeownership.
While the government funds and supports numerous DPA programs itself, there are actually a wide variety of sources you can explore for home buyer grants and down payment assistance:
- Federal, state and local government agencies
- Private lenders and mortgage companies
- Banks and credit unions
- Nonprofit groups
With so many DPA programs to consider, be sure to research your own area to learn everything you can about your available options. Keep in mind that some lenders may set higher interest rates to offset the risk of extending loans with no or little money put forward as a down payment. A higher interest rate could mean larger monthly mortgage payments — and that’s something you’ll need to budget for when buying a house.
Also, while these programs are focused, first and foremost, on helping the financially disadvantaged buy a house with no down payment, first-time home buyers may also receive closing cost assistance. That includes covering expenses like origination fees, attorney fees, recording fees, taxes and other closing costs, in addition to the down payment.
What are your down payment assistance options?
If you do secure down payment assistance, the funds will likely be structured in one of a few ways. In some cases, you’ll receive money for a down payment with no strings attached, while other programs hand out loans that you’ll need to repay — albeit with favorable lending terms.
4 types of down payment assistance programs
- Grants
- Low-interest loans
- Forgivable loans
- Matched savings programs
1. Grants
It's exceptionally rare for lenders of any kind to hand out money without any expectation of repayment or compensation. That’s why the most sought-after type of down payment assistance is in the form of grants for low-income families to buy a house.
Grants are essentially given as a gift, meaning the recipient has zero obligation to repay the entity providing the funds. In some cases, though, you may need to live in the home for a certain period of time before the grant will be forgiven. Otherwise, you may be required to repay the down payment amount.
Entities offering down payment assistance grants can include: government bodies, charities, private institutions or even individuals. Some of the more popular home buyer grants include the many FHA down payment assistance programs available around the country. Although offered through the Federal Housing Administration (FHA), these DPA grants can vary by state, county and city.
2. Low-interest loans
Depending on your lender and financing options, you might be able to secure a second, low-interest loan in addition to your mortgage. The funds from this loan can be used to cover the costs of a down payment, closing costs and other mortgage expenses.
Just like with your mortgage, a low-interest loan would come with its own amortization schedule and use your home as collateral. Low-interest financing might help get your mortgage across the finish line, but you’ll be making two mortgage payments each month.
3. Forgivable loans
Another assistance program that places a second mortgage on your new property is a forgivable loan. These loans are structured with a “forgiveness period,” stipulating that the lender does not need to be paid back as long as you don't move for a given number of years.
Typically, lenders establish this period as five years, but they do have the option to extend the period as much as 20 years. This type of financing usually comes with an interest rate of 0%.
However, if you were to move before the forgiveness period concludes, you’ll be on the hook for the entire loan amount. If you do decide to use forgivable loans for down payment assistance, you’ll want to be certain that you plan to stay in your new home for a while.
4. Matched savings programs
Individual development plans, or matched savings programs, are yet another option you’ll have for down payment assistance. Using this approach, you would make regular deposits to either a bank, community organization or government agency. That institution would, in turn, match whatever amount you handed over to the account. Eventually, you could use the full amount of funds in the account to help cover the costs of a down payment.
With a matched savings program, you can effectively double your savings. With $3,000 deposited into one of these accounts, the organization or government agency would contribute an additional $3,000, giving you access to $6,000 for any mortgage expenses.
Who qualifies for down payment assistance?
Eligibility qualifications can vary — sometimes significantly so — across down payment assistance programs. That being said, first-time home buyer government programs are designed to help people who otherwise wouldn’t qualify for a conventional mortgage. With that in mind, you may find that many home buyer grants set strict financial requirements.
Although not exhaustive by any means, here are a few common eligibility standards you may need to meet to receive down payment assistance:
- You’re a first-time home buyer
- Your credit score is above the required minimum (620, for instance)
- Your debt-to-income ratio is below the required maximum
- Your income level is below the required maximum
- Your home is located in an eligible area (when applying for locally based DPA programs)
- The property will serve as your primary residence and you agree to live in the home for a certain number of years (can be as many as 10 years)
- You may be asked to take a course on home buying so you understand the financial responsibilities that homeownership entails
- You may be required to contribute to the down payment
How much money can you get with down payment assistance?
At the risk of sounding like a broken record, it really depends on the specific guidelines set out by your DPA program. Know that there will usually be some limit on the amount of money that home buyer grants will offer, though. These limits may be a set dollar amount — like a $5,000 first-time home buyer grant — or they may be calculated as a percentage of the purchase price.
In some cases, percentage caps may range from 3%-10% of the sale — far lower than what you’d need to put down to avoid private mortgage insurance. With that in mind, many people pair home buyer grants with loans like FHA mortgages that have flexible down payment options.
How to find a down payment assistance program near you
With so many mortgage assistance programs out there, it can be tricky to know where to begin. As a general rule, start local. You may be able to find a ton of DPA programs available to you through your state or local government. Check with the U.S. Department of Housing and Urban Development, your state’s housing authority or Down Payment Resource for more information on down payment assistance options.
When in doubt, just ask your loan officer. They’ll be able to point you in the right direction and offer their expert advice on the best ways to use government housing grants and other home assistance programs.
Conventional loans with low down payments
While you might expect to require a specific government program to help when you can't put down a large down payment, there are actually a range of conventional mortgage options for people seeking a low- or no-down-payment mortgage, including
- HomeReady
- Home Possible
- HomeOne
3 other mortgage assistance options to explore
If you’re having trouble qualifying for a down payment assistance program, some mortgage programs can offer varying down payment requirements. Let’s take a closer look at some of these loans and whether you might qualify for the benefits they offer:
- FHA loans
- VA loans
- USDA loans
1. FHA loans
Down payment assistance through a second mortgage might be harder to secure if you’ve had financial hardships in the past. If you’re looking to buy a home but don’t have the capital for a typical down payment, or the credit for a second loan, FHA mortgages might be a good choice.
Since these loans are insured by the government, lenders can lower the threshold for certain requirements when approving a loan, including the down payment. With a portion of their financing insured, banks can be more flexible with their mortgage approval terms, creating new paths to homeownership for borrowers who apply for an FHA loan.
FHA loan applicants with a credit score of 580 or higher can qualify for options with a 3.5% down payment option. With an even lower credit score, maybe in the 500-570 range, you might have to contribute at least 10% for a down payment on the home.
2. VA loans
If you’re a retired or actively serving military member, the VA loan program allows lenders to approve mortgages with more flexible eligibility requirements and down payment requirements. In fact, some VA loans act as zero-down mortgages because qualifying borrowers can secure financing without putting any money down.
As an eligible VA loan applicant, you may save thousands by skipping the down payment altogether while also benefiting from comparatively lower interest rates that can only be accessed through this type of financing.
3. USDA loans
Similar to FHA loans, USDA loans are designed to make it easier for qualifying families to invest in a home. Backed by the U.S. Department of Agriculture, USDA loans also assure creditors that their portion of the sales price is insured, allowing them to be more lenient about eligibility requirements.
Usually intended for buyers in rural neighborhoods, USDA loans may also be available in a variety of eligible areas across the country. Meeting the criteria for this type of financing means you could secure a USDA home loan with no down payment requirement.
What are the next steps I can take to get a mortgage?
Down payments might present the largest barrier to entry for prospective buyers, but there are plenty of viable assistance programs available. Depending on your financial background and how much mortgage you can afford, this upfront expense can be made much less daunting.
Assistance programs might vary from area to area, so it’s always best to do your own research to find what plan suits your needs. Meeting with a loan officer could also help clear any confusion and identify your best approach to buying a home.
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