Down payment assistance: What it is and how it works

If you dream of owning a house but can’t afford the down payment needed to get a home loan, you’ll be happy to know there are state and local assistance programs to help make homeownership a reality for you. A large number of grants and loans are available to help cover down payments and closing costs for first-time homebuyers across the country. Learn more about them as you take your first steps in the exciting journey to homeownership.

What is down-payment assistance?

Local and state finance agencies offer most of the down payment help available for first-time homebuyers. Combined with mortgages, these programs aim to make housing more affordable. These are some downpayment assistance options available:

• Grants: As a qualified homebuyer, you can receive funds to cover the down payment on your new home. This is money you do not need to repay. Homebuyer grants can also cover the closing costs if you already have the full down payment amount. 
• Forgivable loans: Also known as second mortgage down-payment assistance programs, these are low-interest or no-interest down payment loans that may be forgivable. In order to qualify for forgiveness, you have to satisfy certain requirements. In most cases, borrowers must continue to own and live in the home after a period of time to avoid repayment of the loan.
• Deferred-payment loans: These tend to be zero- or low-interest loans that offer a fixed rate to help cover down payment and closing costs. Typically, payments are not due unless you sell the home or refinance your mortgage. If you decide to sell and have a zero-interest deferred-payment loan, you only have to pay back the amount that you borrowed, regardless of how much time has gone by.
• Low-interest loans: If you do not qualify for any grants for homebuyers or forgivable loans, you may still be eligible to receive a low-interest loan that helps cover the down payment and closing costs on your home. These loans usually offer a repayment plan at a competitive interest rate. While these do need to be paid back, they spread down payment costs over time to lower your initial up-front costs.
  

How to qualify for down payment assistance

There are many programs and options available to help you afford the down payment on your new home. While most of these down payment assistance programs are meant to support first-time homebuyers, don’t let previous homeownership discourage you. If you haven’t owned a home in the past three years, you may still qualify for some programs.

You can also qualify for targeted programs. These programs are designed to help valuable workers such as firefighters, police officers, teachers and active-duty servicemembers buy homes.

Your eligibility depends on a variety of factors. While each program has different eligibility requirements, these are some of the elements that determine how much help you can receive and on what terms:

• Your credit score.
• Your debt-to-income ratio.
  
• Your income.
• The number of people in your household.
• The home purchase price cannot exceed the maximum limitations set by the agency offering assistance.
• Completion of a homebuyer education program.

Assistance programs cannot finance the down payment of rental or investment properties. This type of assistance is only for buyers who will live in their new property.

How to get down-payment assistance

There are programs available in different states. Each down payment assistance program requires its own application forms and process. By working with a local real estate professional, you can gain insight and understanding on local programs offered by your city and county.

You can also apply for a mortgage with a lender who works with down payment assistance programs. Once approved for assistance, program issuers send the funds to the lender at closing.

What happens if you qualify?

Down payment assistance programs can be a great option to help you become a homeowner when you don’t have the funds readily available to cover a down payment. If you qualify, it’s important to review the mortgage interest rates offered with these programs. At times, these rates can be higher and could result in a more expensive mortgage with a higher monthly payment. If that is the case, you’ll have to evaluate your options and decide what’s best for you.

Some buyers who find themselves in this situation choose to delay their home purchase. When buyers save for the down payment on their own, they often get a better mortgage interest rate independent from down payment assistance programs. This can result in long-term savings for the homeowner.

On the other hand, there are buyers who qualify for down payment assistance programs and choose to accept the higher mortgage interest rates. This allows them to purchase a home sooner while they benefit from lower out-of-pocket expenses in the short run.

Alternatives to down payment assistance programs

There are buyers who don’t qualify for down payment assistance programs but still require help to cover the initial costs of homeownership. If you find yourself in that situation, there are alternatives to get the help you need. Some of these include:

• Matched savings programs: These programs partner with nonprofits or government agencies to help you with your down payment. You open a dedicated down payment savings account and receive matching contributions from agencies.
• Lender down payment assistance programs: Some lenders also offer their own assistance programs. Typically, these options have fewer restrictions on ownership history. They are often available to current homeowners, as well as first-time buyers. Usually, these loans require you use the funds only to purchase your primary residence. They offer fixed interest rates set by the lending institution and are based upon their own eligibility requirements
• Family gifts: At times, parents or other relatives can gift you the funds needed to cover all or part of your down payment. If you use family gifts to secure your home mortgage, you need to make sure these funds are documented. It’s also important to keep the gift amounts within your lender’s limits. Lenders have their own restrictions on what percent of your down payment can come from gifts.

There are a variety of affordable loan programs that can help you with your down payment or closing costs. Contact a Home Lending Advisor today for more information on affordable lending and available assistance programs.