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Down Payment Assistance Programs And Grants: What They Are And How They Work


Down payment assistance comes: One of the biggest hurdles that first time homebuyers face is saving up for a sizable down payment on a home.


What Is Down Payment Assistance?

When you buy a home, you’ll usually have to put money down that’s equal to a percentage of your home’s final purchase price. This is called your down payment. The amount you’ll need will vary and some mortgage programs require no down payment at all. While there are variations, coming up with this cash is often a difficult hurdle for buyers.

As the name suggests, down payment assistance helps you cover your down payment as a first time home buyer.

Who Qualifies As A First-Time Home Buyer?

Most government and charity programs have strict definitions for who qualifies as a first-time home buyer. If you haven’t had any kind of homeownership in the last 3 years, most state, federal and nonprofit programs consider you a first-time buyer, even if you’d owned a home before that 3-year period.

You can’t own any form of rental or investment property and get first-time home buyer down payment assistance, even if you don’t live in the property.

How Does Down Payment Assistance Work?

Down payment assistance comes in the form of grants, loans and other programs. It’s typically reserved for first-time home buyers only. They can be run by a variety of organizations, such as your local or state housing authority, or by a nonprofit.

Eligibility is determined by your household income and credit history, varying by state and program. An application is typically needed, and sometimes you’re also required to attend training or home buyer education on the mortgage process and maintaining finances.

How much you’re awarded differs depending on the program. Some programs offer a percentage based on the home’s sale price, while others cap assistance at a certain dollar amount. When looking for programs to apply for, research their requirements, whether it’s a grant or loan and how much assistance you can receive.

In addition, you should look to make sure that the down payment assistance you’re applying for will be acceptable to your lender.

Types Of Down Payment Assistance

Most assistance comes in the form of first-time home buyer grants and loans offered at the state and local levels. There may even be funds available from the private sector and nonprofits where you live.

Grants

The most valuable form of down payment assistance is the grant. That’s because grants provide money that homeowners never have to repay – it’s considered a gift.

An important word of warning here is that some programs that are labeled grants by the organization doing the funding may actually create a second lien on your home. While there’s nothing inherently wrong with this as long as you know what you’re getting into, make sure to carefully read the terms associated with any agreement for down payment assistance. You’ll also want to make sure your lender is aware of the grant, otherwise you might end up with a silent second lien on you home.

Forgivable Loans (At 0% Interest)

Forgivable mortgage loans are second mortgages that you won’t have to pay back as long as you stay in a home for a set number of years.

These loans come with an interest rate of 0%. Participating lenders will forgive them, meaning that owners won’t have to pay them back, after a certain number of years. Often, lenders will forgive the loan after 5 years, but they do have the option of not forgiving these loans for a longer period, even up to 15 or 20 years.

However, you’ll have to repay these loans if you move before the forgiveness period ends. For instance, if your loan officer says it will forgive your loan after 5 years and you move, refinance your loan or sell your home in 4 years, you’ll have to pay back all or a portion of your forgivable loan.

This second mortgage will usually be large enough to cover your entire down payment.

Deferred-Payment Loans (At 0% Interest)

You might also qualify for a second mortgage with a deferred payment. You don’t have to repay these second loans for an amount large enough to cover your down payment, until you move, sell, refinance your first mortgage or pay down your first loan.

However, these loans are never forgiven, so you’ll have to repay them if you ever leave your home. You’ll usually do this through the proceeds from selling your residence.

Low-Interest Loans

Your lender or another organization might offer you the opportunity to take out a second mortgage loan at the same time your first mortgage is finalized. You can use the funds from this loan to cover your down payment. You’ll have to repay this loan each month, usually when you make your payments on your first loan. This means you’ll be making two mortgage payments each month.

The goal is to nab a low interest rate on these loans. Some lenders or organizations might offer these second loans with no interest at all.

Matched Savings Programs

Matched savings programs, otherwise known as individual development accounts, are another way for homeowners to help pay for their down payments. In such programs, home buyers deposit money into an account with a bank, government agency or community organization. That institution agrees to match however much the buyers deposit. Buyers can then use the total amount of funds to help cover their down payments.

For instance, buyers might deposit $5,000 into an account. The bank, government agency or community organization with which they are working will then add $5,000 more into the account. The buyers can use this $10,000 to cover the cost of their down payment.

Down Payment Assistance FAQs

Let’s talk about some common questions that come up around down payment assistance.

How long does it take to get down payment assistance?

How long it takes depends on the program and the type of assistance. Each state offers its own programs, as do different cities and organizations. These programs move at different speeds depending on the demand and size of the program.

It’s important to know that, if you apply for down payment assistance, it may take longer to close on your home. The assistance program must work with your lender to secure the loan and the down payment funds. This can add time to the closing process, depending on how quickly the down payment assistance program acts.

What do I need to qualify?

The two most common requirements you need to meet are a minimum FICO score of 620 or higher, and income that meets the program’s requirements. Many programs also consider your debt to income ratios.

Other common requirements vary by program. Some of these requirements include:

  • The home must be in a specific locale or county.
  • You must be a first-time home buyer.
  • You must attend a class on home buying and finances.
  • You must live in the home for a certain number of years (often 3 – 10 years).

How can I apply?

Start by researching what programs are available in your area, if any. HUD has a list of local home buying programs by state. Check with your city and county to see if they offer any loans or grant programs. Search their websites for information on how to apply. Reach out to them via email or phone for specific answers you can’t find online. Make sure your mortgage lender works with the program.

  • Front End Ratios: monthly mortgage payment, HOA fees, property taxes, mortgage insurance, and homeowner insurance should be less than 31% of your monthly gross Income.
  • Back End Ratios: mortgage payment and all other monthly consumer debts, should be less than 43% of your gross monthly income.
  • Back End ratios might get an exception at the underwriter’s discretion with strong compensatory factors.

The Bottom Line

Before considering how much money you need for a down payment and whether you’ll need assistance with paying for it, start the process of getting preapproved for your mortgage. That way, you know how much house you can afford before saving for a down payment and closing on a property.

It’s possible to qualify for a mortgage from conventional lenders with a down payment as low as 3% of a home’s final purchase price. And if you need help coming up with an even smaller down payment, the down payment assistance programs offered by community organizations, government agencies and local lenders could help you clear this financial hurdle.

Are you ready to get started with the home buying process? Get approved for your mortgage today with help from our team of experts.

Give us a call! (714) 248-8588  One of our mortgage specialists would be happy to answer all of your questions.

**Premier Home Financing is not affiliated with or acting on behalf of or at the direction of FHA, VA, USDA or the Federal Government.

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