Buying a home is no easy feat. You usually have to put down money equal to a percentage of the final purchase price, or your down payment. Having this upfront cash on hand may not be easy for everyone. In fact, it's one of the major hurdles when buying a home. This is why down payment assistance programs are available to qualifying home buyers.
Here's a quick guide that will explain what a down payment assistance program is, how it works, and what the different options are that exist to help you reach your goal of owning a home.
Down payment assistance (DPA) is any type of program designed to help home buyers afford a down payment. Some programs also help lower or cover your closing costs. There are thousands of DPA programs available across the country, and the majority of them are offered at state, county, and city levels, and even through some banks and lenders.
Down payment assistance is typically geared toward first-time home buyers, but there can also be assistance available for repeat home buyers. These programs typically have eligibility requirements and borrowers usually have to take out a mortgage with a participating lender to take advantage of their assistance program. The funds often come from the U.S. Department of Housing and Urban Development, or HUD, as well as employers, community organizations, and state and local governments. Any type of down payment assistance is likely to have certain qualifications. The majority of these programs are geared toward first-time home buyers.
A first-time homebuyer is someone who hasn't ever owned a home or hasn’t owned a home in the past three years. Beyond that, other typical requirements include a minimum credit score of 620, a low-to-moderate household income, and a debt-to-income ratio.
Do take note that these requirements vary from program to program. Likewise, many DPA programs also require the following:
- You must live in a certain city or county
- You must purchase a primary residence, not an investment or rental property
- You must attend a first-time homebuyer class or financial literacy classes
- Purchase a single-family home, condo, or a townhouse
- You must be in a public service profession, such as a teacher, firefighter, police officer, emergency responder, active-duty service member, or other public servant.
- Qualify for a 30-year, fixed-rate first mortgage to buy the home.
Down payment assistance comes in three main types: loans, grants, and credits, each with its pros and cons. Here are some of the most common:
- Grants: Home buyer grants are the most popular and most valuable form of down payment assistance. This is because it provides homeowners with money that they never have to repay since it's considered a gift. If you qualify, you can use the cash sum to cover all or part of the down payment or closing costs.
- Forgivable loans: A forgivable loan is technically a second mortgage large enough to cover the down payment, but it acts as a grant since you don’t have to repay the loan if you meet certain requirements.
- Deferred payment loans: A deferred payment loan most often takes the form of a no-interest second mortgage that typically covers the cost of the down payment.
- Low-interest loans: This type of down payment assistance also functions as a second mortgage but with a lower or more affordable interest rate than your first loan.
- Individual Development Accounts or matched savings programs: Also called a matched savings program, an Individual Development Account (IDA) is a unique type of down payment assistance.
There are many ways to find down payment assistance. Here's where to start:
- You can check the HUD website for local home-buying programs at the state level.
- Contact your state’s HFA or visit its website to learn about your own DPA options.
- Check your city or county website to see if they offer any grants or loan programs.
- States and some larger cities have housing finance agencies.
- Municipalities often have housing support programs.
- Nonprofits focused on housing are also good places to look for grants.
- Look for down payment assistance programs for specific groups.
- Your real estate agent and mortgage lender can also be great resources.
- Private company Down Payment Resource also provides various resources.
Understand that down payment assistance varies from state to local levels, so the amount of time it takes to get one mainly depends on the program and the type of assistance. While the timeline varies, you can expect that it will be a relatively long process.
If you're considering applying for a down payment assistance program, you may want to start looking for your options before you start your home search.