What is down payment assistance? A pipe dream? Something that was available to our forefathers, but not to us? Or is down payment assistance actually accessible in today’s real estate environment?
Here’s the deal: Down payment assistance lets homebuyers who are short on cash use loans and grants to help come up with the down payment for a mortgage. These programs are not well-known — a 2018 report by the Urban Institute said many renters are not aware such help is available.
However, there is plenty of help around if you know where to look. The Urban Institute counted 2,527 active down payment assistance and low-down payment programs across the country. And, according to a 2014 report from RealtyTrac, 87% of U.S. homes qualify for down payment help.
A fair number of homebuyers do use these programs to buy their homes. “I have clients that do it,” says Jeremy Larkin, a Houston agent who works with 73% more single-family homes than the average agent in his market. “I have clients that are using it right now.”
It’s not a pipe dream, and it’s potentially available to you today. Here’s what you need to know.
Types of down payment assistance programs
As noted, there are more than 2,500 down payment assistance programs that are run by more than 1,300 different agencies.
Each agency and each program has its own approach. However, they can generally be divided into these types.
These are financial gifts that typically don’t have to be repaid. They are — obviously — the most desirable type of assistance.
There are different types of grants. One popular grant type is a matched savings grant, which matches the buyer’s down payment contribution, up to a certain amount. In other words, the grant can provide only part of the down payment — if a buyer wants to put 20% down on a house, they’ll need to come up with 10% before the grant will offer them the other 10%.
These are loans taken out to subsidize the down payment, in addition to taking out a principal mortgage. These loans have to be paid back, although sometimes the payments don’t start for a few years.
Second mortgages may charge zero interest, or they could charge higher or lower interest than the principal mortgage, again, depending on the program.
Forgivable second mortgages
These are second mortgages that, like the name indicates, may be forgiven — that is, they may not have to be paid back — but there are certain conditions that the homeowner has to meet. Usually, the buyer will need to stay in the home for a certain amount of time; they can’t sell, refinance, or move out of the home for a while.
The time period you have to stay put to get the loan forgiven may just be a few years, or it may go up to 20 years.
How much can buyers save with down payment assistance?
A 2016 RealtyTrac study found homeowners who use down payment assistance save nearly $18,000 on average over the life of the loan, compared to buyers who aren’t taking advantage of these programs. That doesn’t mean buyers got that much money in cash for a down payment, however.
The actual assistance came to $5,965 on a median-priced home. Most of the savings — another $11,801 — came from the lower monthly mortgage payments over the life of the loan.
Qualifying for down payment assistance
Not just anybody can use a down payment assistance program. They are usually intended to help specific buyers.
While the programs vary in their requirements, here are some common eligibility guidelines.
Have you owned before?
First-time homebuyers are most frequently the beneficiaries of these programs.
That doesn’t mean you cannot have ever owned a home, however. If it’s been three years since you last owned a home, you may qualify as a first-time buyer.
How much do you make?
Income caps are common for these programs. Most programs are geared toward low- and middle-income buyers. But what qualifies as low- or middle-income depends heavily on your area.
For instance, the California Housing Finance Agency (CalHFA) MyHome Assistance Program says buyers in Los Angeles County can earn up to $153,000 and still qualify.
Down payment assistance is not for investors, but for borrowers who plan to live in the home after purchase.
Primary residences only
People purchasing second homes or vacation homes generally do not qualify for down payment assistance.
Typically, down payment assistance programs are only available for designated geographical areas. However, the large number and wide variety of programs means that odds are there is a program available for any area.
Often, the buyer has to contribute some of the down payment in order to qualify for the down payment assistance.
This is a requirement for many programs. Applications may only be approved after the borrower has taken an approved buyer education course.
Qualifying for a mortgage
As the name suggests, down payment assistance programs only help you with a down payment, which is only a portion of the cost of a home. As such, borrowers will also have to qualify under the guidelines of a mortgage lender, including meeting the income, debt, credit history, and other requirements.
While these are the most common qualifications, there may be others. Eligibility can also turn on factors such as the size of the loan and the size of the family occupying the house.
The plethora of restrictions mean that down payment assistance, while very helpful to those who qualify, isn’t available to everyone. Larkin says he brokers a deal using down payment assistance only once every three months.
“We’ll get more people that ask about it and don’t qualify for it,” Larkin says. In his market, with his clients, the income caps are usually the requirement that borrowers can’t meet in order to qualify for down payment assistance, he says.
In addition to these general requirements, some down payment assistance programs target specific groups of people. For example:
- Correctional officers
- Military veterans and active-duty personnel
Can you use down payment assistance with a conventional loan?
Down payment assistance programs can be used with most loan types — including conventional loans and government-backed loans like FHA, VA, and USDA loans — but not every lender is able to accommodate them.
For buyers struggling to come up with any savings for a down payment, there are two zero-down mortgage options: VA and USDA loans.
The zero-down VA loan program is available to qualified active and former service members and their spouses. USDA zero-down loans can be used, subject to income restrictions on the buyer, in many areas that are more suburban and rural.
If you plan to use a down payment assistance program, make sure to ask your lender if they support that program first.
Why would you use down payment assistance?
Down payment assistance is not necessarily right for, or available to, every buyer.
The major benefit is that assistance makes it possible for someone to buy who doesn’t have enough money for an adequate down payment. “This particularly helps the younger generation that hasn’t had the opportunity to save money,” Larkin says. “This can definitely get them in the home.”
How to find down payment assistance to buy a home
With all the restrictions, it may seem unlikely that you can find a program that would work for you. However, that’s not necessarily so.
The Urban Institute said in its report that in metropolitan statistical areas it studied in 2017, between 22% and 51% of people could qualify for anywhere from 3 to 14 programs.
And the amount of assistance available ranged from $2,000 to more than $39,000. So it makes good financial sense to at least check.
Here are ways to find a down payment assistance program that could help you.
One way is to simply ask your real estate agent for a referral. “Align yourself with a quality agent,” Larkin advises.
“Most quality agents are going to have relationships with lenders that are going to be able to educate on this.”
The federal Department of Housing And Urban Development has an online database of housing assistance programs by state.
Visiting this website and clicking on your state will pull up resources including down payment assistance programs that may be available in your area.
For instance, the links for Texas include the Texas State Affordable Housing Corporation, a non-profit with a Home Sweet Texas Home Loan Program that helps low- and moderate income Texans with down payment assistance grants and forgivable loans.
A simple internet search is likely to turn up some possibilities as well. For instance, searching for “Milwaukee down payment assistance” leads to a Greater Milwaukee Realtors Association program that provides up to $6,000 in down payment assistance.
Other potential sources include banks, local and state government agencies, and employers.
Bear in mind, not all lenders work with down payment assistance programs. If you plan to use down payment assistance, it makes sense to choose your lender after deciding which down payment assistance you will use. And if you have questions, a good real estate agent with experience helping buyers with these programs can help answer them.
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