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Down Payment Assistance: What It Is And How To Qualify

Carey Chesney7-Minute Read
January 26, 2022

When it comes to the fun but complicated process of buying a home, we all can use a little assistance in a variety of ways. From your real estate agent to your inspector to your title company and a bunch more “assistants” in between, it truly takes a team to buy a home. This is especially true for first-time home buyers.

A key member of this team is your lender, who can take you through all the various loan types available to you. One thing you should make sure they cover and fully explain is whether down payment assistance is an option for you.

What Is Down Payment Assistance?

First, let's start this part of your home buyer education with the definition of a down payment. This refers to the lump sum of money you pay when the sales transaction is processed. The amount of your down payment is a percentage of your home’s purchase price and reduces the amount that you’ll need to borrow from your mortgage lender.

For example, if you are purchasing a $250,000 home and your down payment is 20% (which is common for a conventional loan), that would be $50,000. The remainder of the purchase price would be covered with your loan, which would be $200,000. Does that seem like too much to put down? Fear not, loans come in many shapes and sizes, with a variety of percentages of the purchase price available, including 0% down payments for some qualified home buyers.

As you can imagine, many home buyers, particularly first-timers, need financial assistance to make their dream of home ownership a reality. It can make it easier to achieve your dream of homeownership, allowing you to have more money available for closing costs and other expenses like home improvements, home maintenance, and much more.

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How Does Down Payment Assistance Work?

Let’s get into the details of how down payment assistance works by starting with who it often works for. The types of people who might pursue down payment assistance are usually first-time home buyers and aspiring home buyers who are generally in need of financial assistance. A down payment can be a pretty substantial chunk of cash, so many home buyers can really benefit from some help.

It’s important to understand that down payment assistance only applies to certain types of mortgage loans. These are Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans, United States Department of Agriculture (USDA) loans, and conventional mortgages. In addition, it's good to know what to expect in terms of the types of interactions you can expect to have with your mortgage lenders related to their pursuit of down payment assistance. A good place to start would be a conversation about where to find and research these types of loans, which can be at the city, county, state or national level. Your lender should be able to spell everything out for you in terms of what is available, but doing your own research on the types of down payment assistance and how they work is always a good idea.

What About First-Time Home Buyer Down Payment Assistance?

Most programs are not specifically for first-time homeowners. However, many people who are likely to benefit most from down payment assistance are first-time home buyers.

Types Of Down Payment Assistance Programs

Here are some of the most common types of down payment assistance programs used by prospective home buyers with an overview of their respective traits.

Housing Grants

Funded through the federal government, housing grants provide an alternative to traditional mortgage loans for low-income families to secure the funds needed for obtaining housing. This can be for purchasing a home, buying rental property for housing income, making major renovations on existing properties or to receive assistance when in danger of losing your home through foreclosure. If you have been denied a traditional loan, this may be an option to consider.

Deferred-Payment Loans

Deferred-payment loans allow borrowers to obtain no interest loans requiring no payments. In exchange for the loan, the borrower turns over the title to the property. When the house sells or if the borrower moves out of the house, the loan must be paid off in full at that time. If the borrower passes away before moving or selling, the proceeds of the home sale after death is used to pay off the loan. This can seem like a great option in the beginning, but always keep in mind that eventually, the loan must be paid.

Forgivable Loans

A forgivable loan is a form of loan in which all of it, or just a portion, can be forgiven or deferred for a period of time by the lender when certain conditions are met. However, if the conditions are not met, the loan has to be repaid – usually with interest.

Low-Interest Loans

A low-interest-rate loan includes fixed amounts for payment each month with a defined payoff timeline. They usually include a fixed interest rate as well. Low-interest-rate loans are among the most competitive to qualify for, which means you will pay less over the life of the loan, but it will be a bit harder to get approved for than some other types of loans.

How Long Does It Take To Get Down Payment Assistance?

So, you’re intrigued about getting down payment assistance and want to know how long it will take? This largely depends on the specific program and the type of assistance. Programs vary in terms of timing mostly due to demand and the size of the program. If you do apply for down payment assistance, be ready for the reality that 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, which can add time to the closing process.

How To Get Down Payment Assistance

Start by researching what programs are available in your area by checking with your city and county to see if they offer any loans or grant programs. Once you find one you think might work for you, talk to your mortgage lender to ensure they work with that specific program. Always keep in mind the eligibility factors you must fulfill in order to qualify for different types of down payment assistance like your credit score, income limits and debt to income (DTI) ratio.

Qualifying for Down Payment Assistance

Requirements vary by program, but these are common criteria:

  • 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).

Loan Programs With Lower Down Payments

Some programs aren’t literally down payment assistance programs. But they can allow your resources to go further through lower purchase prices, special incentives and other methods.

FHA Loans

Many first-time home buyers rely on government-backed loans like those from the Federal Housing Administration. They reduce the amount needed for down payments even for those with less-than perfect credit.

An FHA loan down payment requirement is 3.5% if your credit score is 580 or higherIf you have a 10% down payment available, you may be approved with a credit score as low as 500.

HUD Home Programs

HUD sells foreclosed homes and sponsors programs that make homes easier to buy for low- and moderate-income people.

Several government agencies that fund mortgages are connected to HUD, including the FHA, VA and USDA. Their loan programs provide guarantees through private lenders.

HUD offers homes for competitive prices; they were last purchased with an FHA loan and foreclosed. They are offered as-is, which means the government offers no warranties or repairs. A thorough home inspection might minimize the risk for buyers. If you buy a HUD home with an FHA mortgage, you may be able to finance renovations with an FHA 203(k) loan and roll both loans into one monthly payment.

There are also home buying programs through HUD that range from no down payment to deep discounts on price. These programs include The Good Neighbor Next Door, Section 8 Housing Choice Voucher Program and Section 184 Indian Home Loan Guarantee Program. You can learn more about eligibility requirements for these programs directly from HUD.

VA Loans

Active-duty military personnel and veterans have long relied on loans backed by the VA. If you meet the service requirements to secure a VA loan, you can buy a home with no money down.

The loans are issued by private lenders with terms determined by the VA. These loans were created in 1944 to make home ownership more accessible to military personnel who might otherwise struggle with securing a mortgage.

Freddie Mac And Fannie Mae

Freddie Mac and Fannie Mae are government-sponsored entities that help low- and middle-income families to become homeowners. Their mortgage programs are called Home Possible® and HomeReady®, respectively.

Their backing makes it possible to get a mortgage loan with as little as 3% down payment.

Both programs list requirements that home buyers must meet. Essentially, the home buyer must be able sell them the mortgage so that they have the liquidity to issue future mortgages.

Community Seconds

Community Seconds is a Fannie Mae-approved second mortgage that allows home buyers to use the funds available from state and local governments as well as housing nonprofits to put together a down payment, get help with closing costs and even complete minor renovations.

Contact your local U.S. Department of Housing and Urban Development, or HUD, office to learn more about the down payment and closing cost assistance available in your community.

HomePath Homes

While down payments are an obstacle for some first-time home buyers, closing costs are another issue. Fannie Mae offers closing cost assistance of up to 3% of the purchase price of their Homepath properties. All the buyer needs to do is take the online HomeReady home ownership course and ultimately buy a HomePath home.

Fannie Mae-owned HomePath properties are offered at a discount after a previous owner defaults on a Fannie Mae mortgage.

Other Housing Assistance Resources And Programs

In addition to down payment assistance programs, there are a slew of other options potential home buyers can explore to help with the financial and logistical aspects of buying a house. A few examples of these include housing counseling classes, local home buyer programs and financial education events hosted by lenders.

The Bottom Line: Is Down Payment Assistance A Good Idea?

Down payment assistance can be an incredible resource for home buyers in need of a little extra help. Understanding how it might best work for you and which type of assistance you need can go a long way toward getting you into your new home. Not sure where to go from here? Get in touch with a Verified Partner Agent and begin your home buying process today!

Carey Chesney

Carey Chesney brings a wealth of residential and commercial real estate experience to readers as a Realtor® and as a former Marketing Executive in the fields of Health Care, Finance and Wellness. Carey is based in Ann Arbor and attended the University of Wisconsin-Madison, where he majored in English, and Eastern Michigan University, where he recieved his Masters in Integrated Marketing & Communications.