As housing prices continue to increase and income growth stalls, it’s becoming more and more difficult for many to save enough money for a down payment on a home. For some, it may make homeownership seem out of reach, but chances are it’s a lot closer than they realize.
Many people are unaware that there are over 2,500 down payment assistance programs available to support homebuyers, making the dream of owning a home more attainable. Let’s explore how down payment assistance works and what programs may be available when buying a home.
How down payment assistance programs work
Down payment assistance programs provide homebuyers with some or all of the funds needed for a down payment. They are aimed at people who would otherwise not be able to afford the down payment, especially first time buyers.
Run by charities, private companies, as well as state, city and government authorities, each program is structured slightly differently. There are various forms of down payment assistance, all with different qualification and repayment conditions.
Assistance amounts can vary, with some programs offering a few thousand dollars, and others running all the way up to $10,000 or more. A number of down payment assistance programs are targeted at first time buyers or provide assistance to those who reside in specific geographical areas or who hold certain careers. Some are restricted according to family size or loan amount. Others may have income limits, meaning if you make over a certain amount of money you would not qualify.
Nearly all programs have a minimum required credit score which is around the 620-660 range, as well as a minimum debt-to-income ratio.
It’s not uncommon for a program to require the homeowner to stay in the home for a set period of time such as three, five, or 10 years. If the homeowner moves or sells before this time they could be required to repay the down payment assistance in full, even if it was provided as a grant or forgivable second mortgage.
Down payment assistance programs are typically structured in one of the following ways:
- As a grant which typically never has to be repaid.
- As a second mortgage, often with a lower interest rate, that is paid back in conjunction with the first mortgage.
- As a second mortgage that delays payments until the homeowner moves, sells, refinances, or pays off the first mortgage -- at which time, payment in full is required.
- As a forgivable second mortgage. This only has to be repaid if the homeowner moves, sells, refinances, or pays off the first mortgage before the funds are fully forgiven -- usually a set period of between five and 20 years.
- As part of an equity sharing program like Unison, where no monthly payments are required, but a portion of future equity is shared.
Since each program is distinct, it is important that you find the right one one for you, from the qualification requirements, to the down payment assistance amount and repayment terms. Look at what programs are available in your area and make sure you carefully review the program guidelines and qualification requirements of each one.
Why use down payment assistance?
Many banks prefer a 20% down payment, and in most cases offer better interest rates and terms to homebuyers who have more money to put down. For many, saving up to reach a 20% down payment would take years, if they could reach that amount at all. Indeed, more than two-thirds of people in an Urban Institute survey said that affording the down payment was a major barrier to homeownership.
If you are one of them, it is certainly worth investigating down payment assistance in your area. You should also look at mortgages that do not require borrowers to put 20% down.
While there are benefits to having a higher down payment, such as eliminating private mortgage insurance (PMI), it’s not the only option. There are low down payment programs like the Federal Housing Administration (FHA) that provide mortgages with as little as 3.5% down, or other lenders who will take less than 20% down, such as 5%-15%.
Those who have limited funds but still desire homeownership can take advantage of the various low down payment loan programs or utilize a down payment assistance program to help them increase the amount of funds they have available to put down on a home.
For example, if a homebuyer was saving $200 a month to purchase a home, it would take over three years to reach a 5% down payment on a $150,000 home. If the homebuyer received $2,500 in the form of down payment assistance, they could shorten the timeline by a year.
As awareness of these programs widens, they are becoming more readily utilized. So far in 2019, the FHA reports that more than 13% of borrowers who used an FHA loan received government help with the down payment.
What down payment assistance programs are available?
There are currently over 2,500 down payment assistance programs available nationwide, and as of Q2 2019, 82.9% of the funds have not been allocated.
If you are not a first-time buyer, don't assume you don't qualify. While many programs require you to be a first-time buyer, approximately 40% do not. And it's also worth knowing that a first-time buyer is defined by the Department of Housing and Urban Development as someone who has not owned a home in the last three years.
Most programs are available on a local level such as a city or county, although there are some statewide or nationwide programs like the National Homebuyers Fund that operate in all 50 states. These programs offer down payment assistance up to 5% of the mortgage loan in the form of a gift or forgivable second mortgage.
United States Department of Agriculture (USDA) has a program for qualified individuals offering 100% financing on qualified homes. It's important to note that most properties are located in rural areas.
The Good Neighbor Next Door Program allows law enforcement officers, teachers, firefighters, and emergency medical technicians to purchase select homes up to 50% off of their appraised value as long as they reside in the home for a minimum of three years.
The Good Neighbor Next Door Program can be paired with a down payment assistance programs like Teacher Next Door or Firefighter Next Door which offer down payment assistance of up to $10,681 in the form of a non-repayable grant for professionals in the fire or education fields in all 50 states.
There are also programs designed specifically for those who have served or are actively serving in the military such as the Dream Maker Military Heros down payment assistance program or low down payment programs through the Veteran's Affairs (VA).
HSH created a map that highlights the individual programs offered in each state. Down Payment Resource can also help you to determine what programs you may qualify for based on your area, income, or job. You can research what programs are available on your city or county’s website as well.
If you are struggling to save enough money for a large down payment, don't let that stop you from buying a home. Explore the programs available in your area or for your profession and speak with an experienced mortgage broker or agent in your area that specializes in programs like these. With the large number of programs available, there is a good chance you can receive down payment assistance in one form or another.