Purchasing a home is exciting, but for many first-time and young buyers, one obstacle stands in the way: the down payment. Among millennials who want to buy a house, 71% said they can’t afford to, according to a 2023 report by the rental website Apartment List. The good news is that homebuyers can get help.
“The down payment is often the biggest hurdle to homeownership. Saving enough could take years,” says Kendra Barnes, real estate investor and founder of The Key Resource, an online guide to real estate investing. “Down payment assistance programs help renters get over that hurdle and make homeownership more attainable.”
You could consider a program if you’re hoping to become a homeowner but struggling to come up with your down payment. You’ll need to know the rules for assistance, including who qualifies, and the pros and cons.
How Do Down Payment Assistance Programs Work?
Down payment assistance programs provide potential homebuyers with money to cover some or all of a down payment, and some programs offer help with closing costs. Assistance can come from many sources, including government agencies and nonprofits, and isn’t always well-publicized.
Programs vary based on where you plan to buy a home. In Texas, for example, the Department of Housing and Community Affairs offers down payment and closing cost assistance of up to 5% of the loan amount for eligible buyers.
Down payment assistance most commonly takes one of three forms:
— Down payment assistance grants.
— Forgivable second mortgage programs.
— Matched savings programs.
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Down payment assistance grants. These grants provide buyers with down payment and closing cost funds that don’t have to be repaid. Two examples are the National Homebuyers Fund and the PenFed Foundation’s Military Heroes Program. The former gifts up to 5% of the loan amount to borrowers, and the latter offers up to $5,000 toward down payments for qualified service members.
Forgivable second mortgage programs. If you don’t qualify for a down payment grant program, you could pursue a second mortgage that is forgiven after you meet certain requirements. For example, you may have to live in the home for a certain amount of time.
The State of New York Mortgage Agency offers a down payment assistance loan that can be used with the agency’s mortgage program and charges no monthly payment. The loan is forgiven after 10 years, unless you sell the home or refinance the mortgage before then.
Matched savings programs. Savings deposited in these special accounts are matched by banks, perhaps partnered with nonprofits or government agencies. The idea is to help aspiring buyers build a down payment.
For instance, Indiana’s Individual Development Accounts match at least $3 for every $1 consumers save.
[Read: Best Mortgage Refinance Lenders.]
Types of Mortgage Down Payment Assistance
The type of mortgage down payment assistance you can receive will vary depending on the state you live in and your personal circumstances, as well as the organization or government agency providing the assistance.
Loans
Some down payment assistance comes in the form of a second mortgage, or a loan you take out in addition to your first mortgage. The most common loans for this purpose are:
— Forgivable loans, which you won’t have to repay as long as you fulfill the program requirements.
— Deferred-payment loans, which only need to be repaid when you sell the home.
— Low-interest loans, which require low monthly payments in addition to your primary monthly mortgage payment.
It’s very common for down payment assistance loans to come with low or 0% interest, which saves you money even if you do need to repay the loan.
Grants
Many down payment assistance programs simplify the process by providing a grant, which is a one-time gift of funds you don’t need to repay. Because they’re gifts and not loans, grants do not come with an interest rate. You may need to meet certain income, residency or credit requirements to qualify for a grant, and they’re often first-come, first-served.
Various state and local housing finance authorities offer grants that cover or offset a down payment, but some also help eligible homebuyers cover other costs, too, including:
— Repairs and rehabilitation.
— Energy-efficiency improvements.
— Closing costs.
— Homebuyer counseling and education.
Tax credits
You may not have considered the effect of homeownership on your taxes — but you should.
Fortunately, some state housing finance authorities provide tax credits that reduce your taxable income, and you can usually pair these programs with the loan of your choice.
Alabama, for example, offers a mortgage credit certificate that reduces your federal tax burden dollar-for-dollar up to $2,000. You can take the credit once per year, at tax time, or you can use it to offset some of the mortgage interest and make your monthly payments more affordable.
But don’t worry about taxes when it comes to any down payment assistance you’ve received, as the IRS generally doesn’t consider that taxable income.
Employer and Union Programs
In addition to government agencies and lender programs, you may find down payment help at work.
Employer-assisted housing initiatives help low- and moderate-income employees afford a home by offering a home purchase benefit, which may be in the form of a grant, or a deferred, forgivable or repayable loan.
In Pennsylvania, for example, eligible employees can stretch their paychecks a little further with a Keystone Advantage Assistance Loan, which provides up to $8,000 in down payment or closing cost assistance. This loan carries 0% interest and is amortized over 10 years.
Unions are another valuable source of homebuying assistance. Members of the American Federation of Government Employees, for instance, can get $2,000 put toward their closing costs, plus a 20% cash rebate on real estate commissions.
Who Qualifies for Down Payment Assistance?
Down payment assistance can be a huge help in buying a home, but not every buyer will qualify. Where you live and how much money you make may influence your eligibility for some down payment assistance programs.
“There are geographical zones and income limits, depending on those zones and how many people are in the household,” says Elysia Stobbe, author of “How to Get Approved for the Best Mortgage Without Sticking a Fork In Your Eye.”
The Virginia Housing Development Authority’s down payment assistance grant, for example, sets limits on household incomes, and buyers must meet a number of other requirements.
How well you fit the criteria can determine not only whether you’re approved for a program but also how much help you receive. Some programs are geared toward first-time buyers, and others allow repeat buyers.
Other eligibility factors could include:
— Your credit score.
— Your debt-to-income ratio.
— Your military or veteran status.
— Your employment in public service.
— Whether you’ve completed a homebuyer education program.
Programs may also set limits on home prices and restrict property types.
“Homes that will be owner-occupied qualify for down payment assistance programs,” Barnes says. “Most down payment assistance programs also work for multiunit properties, as long as the buyer will be living in one of the units.”
Generally, rental and investment properties don’t qualify for down payment assistance.
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How to Apply for Down Payment Assistance
If you’re ready to buy a home and want to use down payment assistance, here are the steps to take.
Explore down payment assistance programs for your state. Each state has a housing finance agency, or HFA, that oversees the affordable housing needs of residents. Locate your state’s HFA website using this directory from the National Council of State Housing Agencies, and search the site for homebuyer programs.
Check for county or city programs. California’s San Diego County, for instance, provides eligible buyers in the city of La Mesa up to $70,000 in down payment assistance.
How to find help near you: The Department of Housing and Urban Development lists local home homebuying programs by state. Simply select your state, and then click on “Assistance programs” under “Buying a Home” to pull up the programs in your area.
Review program requirements and gather documents. Once you’ve selected a program, you can collect the paperwork you will need for the application. In addition to ID, such as a driver’s license or Social Security card, you might need to provide:
— Pay stubs.
— Bank statements.
— Employment history.
— Recent tax returns.
[Read: Best VA Loans.]
Pros and Cons of Down Payment Assistance Programs
“These programs can be a wonderful way to achieve the dream of homeownership,” Stobbe says. But there are some tradeoffs, too. You’ll want to weigh the pros and cons of a down payment assistance program before using one.
Pros
— Buy with a smaller budget. The main advantage of down payment assistance is that it could help you buy a home when you don’t have all the cash on hand for a down payment.
— You may not need to repay. If you qualify for a grant, that’s essentially free money, assuming you meet all of the program’s requirements
— Reach homeownership faster. When you don’t need to spend months or years saving for a big down payment, you can buy a home sooner — and shortly begin building equity, as well.
Cons
— Higher interest. Mortgage programs with down payment assistance may charge higher interest rates than borrowers without it, Stobbe says, usually because the buyers don’t have as much “skin in the game,” or money invested. The North Carolina Housing Finance Agency’s loan program, for example, charges higher rates to borrowers who accept down payment assistance. That means they’ll pay more in interest over time.
— Bigger payments. Another effect of higher interest rates is larger monthly mortgage payments, which might make it tougher to afford a mortgage, even with the down payment assistance.
— Not everyone qualifies. Some down payment assistance programs have strict requirements, which could keep out borrowers who really could use the help.
Down Payment Assistance Alternatives
If you don’t qualify for down payment assistance, you could ask family members for gift money toward a down payment or explore loans with no or low down payments.
If you plan to use gift funds toward a down payment, you will need a gift letter stating the donor’s name and that the money is not a loan. Also, be aware that some mortgage loans may have limits on how much gift money you can use toward a down payment.
If you’re putting down less than 20% on a conventional loan, some of the money has to come out of your own pocket. But loans backed by the Federal Housing Administration, U.S. Department of Veterans Affairs or U.S. Department of Agriculture allow any amount of gift money with proper documentation.
While you’re considering down payment gifts, look at the down payment requirements for different loan types. VA loans offer 100% financing for veterans, and USDA loans provide the same for income-eligible buyers in certain rural areas.
“First-time homebuyers can put down as little as 3% in some markets for a conventional loan,” Stobbe says, while “3.5% is the minimum required for an FHA loan to qualified buyers.”
Mortgages with no or low down payments may sound appealing, but they have a catch: These loans may come with added fees at closing or require private mortgage insurance. The latter can inflate your monthly mortgage payment.
Yes, a low-down-payment loan or gift can help you buy a home, but don’t overlook another obvious path. “There’s the good old-fashioned savings plan,” Stobbe says.
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How to Get Down Payment Assistance for a Mortgage originally appeared on usnews.com
Update 02/27/24: This story was published at an earlier date and has been updated with new information.
