Saving for a down payment on a home can take a long time, and aspiring homeowners can get frustrated to see home prices climbing while their savings aren’t growing as quickly as they’d like.
Luckily, there are down payment assistance programs to help people achieve their homeownership dream. Here’s a look at how down payment assistance works as well as the available programs.
What Is Down Payment Assistance?
Down payment assistance makes funds available to help qualified first-time homebuyers make a down payment on a home. Sometimes known as DPA, this assistance typically comes in the form of a loan, a grant, or credits. Some options need to be repaid, and some don’t.
Down payment assistance can help people with low to moderate income buy a home sooner rather than later. However, it’s important to understand the pros and cons of DPA before you opt in.
“The amount of the grant a borrower can receive varies greatly depending on your state,” says Tai Christensen, co-founder and chief diversity and public relations officer at Arrive Home, an organization in Eagle Mountain, Utah, that provides down payment assistance and other resources to underserved communities. “Grant funds are also very limited, and usually available on a first-come-first-serve basis.”
How Does Down Payment Assistance Work?
While it’s possible to buy a home with a down payment as low as 3%, the average down payment these days is about 7% of a home’s purchase price. If you have some money saved but need a boost to make a healthy down payment, the right DPA program could save the day.
Many DPA programs are funded by the federal government and operated by states and local governments. Keep in mind that DPA programs are typically only available to first-time homebuyers, and there may be other eligibility requirements such as income limits and credit score minimums. The amount you’ll be able to get will depend on the program, and may be capped at a certain limit.
“Once a homebuyer determines their eligibility, they must complete an application for the down payment assistance program,” says Nathan Claire, a Realtor and founder of Buying Jax Homes in Jacksonville, Florida. “This typically involves submitting financial information, proof of income, and other documentation. After reviewing the application, the down payment assistance program will either approve or deny the homebuyer’s request for funds. If approved, the program will provide the funds directly to the lender or escrow company handling the home purchase.”
8 Types of Down Payment Assistance
There are several types of down payment assistance, each with its own set of pros and cons. Here’s the scoop on eight common types of down payment assistance.
1. Cash grants
Cash grants can be the most helpful type of down payment assistance for low- and moderate-income homebuyers because they don’t need to be repaid. Grants typically can cover anywhere from 2% to 5% of the home purchase price.
Grants can come from state or local governments, while others are provided by banks, employers, and other private financial institutions. Some grants come with requirements such as a minimum number of years you’ll need to live in the home. Just make sure you understand the terms before you accept a grant because doing so may place a second lien on your home.
2. Closing cost credits
Closing costs are fees you pay to fund your loan and transfer legal ownership of the home. They typically cost 2% to 5% of the purchase price. Some mortgage lenders help borrowers pay closing costs in the form of credits. The lender likely will charge you a higher interest rate on your loan to recoup the closing costs it pays on your behalf. While this can be a good short-term solution to reduce closing costs, you may pay more in the long run.
3. Interest rate reductions
Discount points allow homebuyers to pay an upfront fee in exchange for a lower interest rate on their mortgage. Some DPA programs pay for discount points to help homebuyers afford a mortgage. By reducing the interest rate, the buyer has a lower monthly mortgage payment and saves more money over the life of the loan. Like other DPA programs, interest rate reductions come with eligibility requirements on income and living in the home for a certain number of years.
4. Property tax credits
Some state-run programs offer homebuyers tax credits with their home loans. As a result, the homebuyer pays less in property taxes, which reduces their overall monthly outlay. Unlike other down payment assistance programs, this one isn’t just available to first-time homebuyers. These credits also usually come with eligibility restrictions, such as the number of years lived in the home.
5. Forgivable loans
Forgivable loans are second mortgages that don’t need to be repaid as long as you don’t sell or refinance your house for a certain number of years. Forgiveness periods range from five to 20 years. Forgivable loans usually come with a 0% interest rate and often can cover the entire down payment.
6. Deferred-payment loans
Deferred-payment loans are second mortgages that you can use to cover your down payment and closing costs. These loans often come with a 0% interest rate. While these loans are not forgiven, borrowers don’t have to repay them unless they move, sell, or refinance their mortgage.
7. Low-interest loans
Low-interest loans can be a good option for homebuyers who are ineligible for grants or forgivable loans. While these loans need to be repaid, they come with minimal interest rates. This helps homebuyers come up with a down payment sooner and pay back the borrowed amount over time.
8. Matched savings programs
A matched savings program involves a prospective homebuyer depositing money into an account where each contribution is matched by a bank or government organization. This can help the homebuyer save money for a down payment twice as fast as they normally would.
How To Qualify For Down Payment Assistance
Most down payment assistance programs are for first-time homebuyers. That means you typically won’t qualify if you already own a home, rental, or investment property. Eligibility restrictions based on your income and credit score are common, and vary depending on the program.
Finding Down Payment Assistance
You can qualify for down payment assistance based on your loan type and location. If you need extra help to make your down payment, you can start by searching online for programs by location and loan types.
Down payment assistance by loan type
Some loan programs are geared toward specific loan types. For example, California has CalHFA Government Loans that offers down payment assistance for Federal Housing Administration loans that can be up to 3.5% of the home purchase price. Even though Veterans Affairs and Department of Agriculture loans don’t require a down payment, the CalHFA VA program and CalHFA USDA program offer down payment assistance that you could also apply to closing costs.
Down payment assistance by state
Many down payment assistance programs are run at the state and local levels. Take a look at the following chart to find out about down payment assistance programs near you:
Down Payment Assistance Programs by State
Here are answers to some frequently asked questions about down payment assistance.