Buying a home is a significant financial transaction and a big commitment. Many people who might want to buy a home are out of reach due to the burden of needing a large down payment.
There are many state and local programs that might help you with your down payment, making that dream of buying a home a reality. This comprehensive guide will go over down payment assistance programs, how they work, and what qualifies you for help.
What is Down Payment Assistance?
Most home purchases require a percentage of your home’s total cost as a down payment. Down payment assistance programs help provide the money you need for a home purchase down payment. The amount you need varies by mortgage program, and some might require little to no down payment. Producing cash upfront can often be challenging for most people, however, the down payment assistance programs help alleviate that burden.
How Down Payment Assistance Works
Down payment assistance is available in programs, grants, and loans. Usually, down payment assistance programs work with mortgages and are meant for first-time homebuyers. The programs are provided by various organizations, including state and local housing authorities and nonprofits. Here are the most standard types of down payment assistance programs available.
Forgivable loans are second mortgages set at 0% interest that you will not have to pay if you stay in the home for an agreed-upon number of years. This loan is enough to cover the costs of a down payment. Lenders forgive these loans, and you will not have to pay them back, and terms have been known to be as short as five years and as long as 20 years. If you move before the forgiveness period ends, you will be required to pay the loan in full.
Deferred Payment Loans
Deferred payment loans are enough to help with a down payment and are in the form of a second mortgage. You would be responsible for paying back after an agreed term, usually moving, selling, paying down, or refinancing the first mortgage. These loans are never forgiven and will have to be paid off at some point, but they help with the upfront costs of buying a host.
Grants are a gift of money provided through several state and local programs and are the first choice for new homeowners as you never have to pay a grant back.
Some financial institutions may offer you the ability to take out a straightforward second mortgage while you are financing the first mortgage. This second mortgage has a low-interest rate and is set up to be paid monthly alongside your mortgage. You may be able to find a bank that will finance these at no interest.
Some banks offer their own down payment assistance programs with their own set of requirements. You can reach out to lenders to see what options are out there aside from the traditional loans.
Although down payment assistance programs are geared towards first-time homebuyers, some allow repeat home buyers under certain circumstances. Usually, you may qualify if you have not owned a home for over three years. Your household income and credit history determine your eligibility to start, and depending on your state and local requirements, you may have to meet more. Some other eligibility requirements may include:
- Taking a homebuyer education course.
- Requiring you to purchase in a specific location.
- Have a set limit on the amount of the home price.
Down Payment Assistance Program Options
You can find your state’s available down payment assistance programs by contacting your state housing authority. You can find your state’s programs available to help you with the purchase of your home by visiting the U.S. Department of Housing and Urban Development (HUD) website. These down payment assistance programs are two of the more common programs available to you.
Community Seconds is a second mortgage approved by Fannie Mae that allows you to use the funds for a down payment on a house. The second mortgage uses funds allocated from nonprofits and state and local governments to help with down payments, complete minor renovations, or help with closing costs.
The Chenoa Fund is an affordable housing program provided by a federally charted government entity, CBC Mortgage Agency, and provides up to 3.5% down payment assistance for your home. You can qualify for this fund at zero interest if you have a credit score of 620 or higher and your debt-to-income ratio is 45% or less.
The Pros and Cons of Using Down Payment Assistance
While using a down payment assistance program provides you with the much-needed finances to help you get into your own home, you must consider the pros along with the cons that come with these programs to make sure they are the right fit for you.
- Down payment assistance programs get you into a home faster.
- They can save you a significant amount of money upfront.
- You may be able to afford more houses and receive more favorable loan terms.
- The loan could cost you more overall if you choose a second mortgage with a low-interest rate.
- Applying for down payment assistance programs can be time-consuming as they require you to apply for each individually.
- You want to be sure you are not taking more assistance than you need so you do not overextend yourself financially.
How to Apply for Down Payment Assistance
There are many down payment assistance programs available, but there is no universal application process. You will need to apply to each program individually. Because of this, you must research each one thoroughly to check the eligibility to ensure you qualify before you apply.
Some loans require you to use a particular loan program as your primary mortgage, some may require you to take education courses, but most are income-specific programs designed for low to moderate earners.