Down Payment Assistance: What It Is And How To Qualify
Carey Chesney5-Minute Read
April 01, 2021
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.
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?
So, what is this seemingly magical assistance that may help you get the home of your dreams? First, let's start 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% (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. 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.
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 FHA loans, VA loans, 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.
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.
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 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.
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.
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 credit score, income limits and debt to income (DTI) ratio.
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, just to name a few.
The Bottom Line
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!
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