March 24th, 2019 10:33 AM by Jackie A. Graves
Buying a home is exciting, but for many
first-time and younger buyers, there's one thing that stands in the way: a down
payment. According to a 2018 survey from rental marketplace Apartment List, 61.7 percent of
millennials who want to buy a home said they can't afford a
down payment. The good news is
homebuyers can get help.
"Down payment assistance programs are designed to
transition people from being renters to homeowners," says Amaya Mignault,
relationship manager with Mortgage Financial Services in Flower Mound, Texas.
It's an option to consider if you're hoping to become a
homeowner but you're struggling to come up with your down payment. However,
it's important to understand the rules for assistance, who qualifies, and the
pros and cons.
How Down Payment Assistance Programs Work
Down payment assistance programs provide would-be homebuyers
with money to cover some or all of their down payment; some programs also offer
help with closing costs. Typically, money is paid at closing and handled by the
Down payment assistance can come from many different sources –
including federal, state, county, city and nonprofit agencies – and aren't
always well-publicized. The range of programs available may vary based on where
you plan to buy a home. In Mignault's home state of Texas, for example, the
Department of Housing and Community Affairs offers down payment and
closing cost assistance of up to 5 percent of the loan amount
for eligible buyers.
Generally, down payment assistance takes one of three forms:
payment grants. Down payment assistance grants provide homebuyers with down
payment and/or closing cost funds that don't have to be repaid. Examples of
nationally available down payment grant programs include the nonprofit National Homebuyers Fund, which gifts
homebuyers with up to 5 percent of the loan amount, and the Dream Makers
Military Heroes Fund from the PenFed Foundation, which offers
up to $5,000 in down payment grant money to qualified military members.
second mortgage programs. If you don't qualify for down payment grant programs, you may
consider a second mortgage down payment assistance program instead. Though
second mortgages charge interest, a forgivable second mortgage may offer a zero
percent interest loan that is forgiven after you meet certain requirements.
For example, the State of New
York Mortgage Agency offers a forgivable second mortgage with a
zero percent interest rate that requires no monthly payments. It is forgiven
after 10 years as long as you use agency financing and continue to occupy the
savings programs. Matched savings programs work a little differently. You make a
contribution to a dedicated down payment savings account, and the matching
entity, which may be a bank partnered with a nonprofit or government agency,
makes a matching contribution.
For example, Indiana's Individual Development Account program matches
a minimum of $4 for every $1 eligible savers contribute toward the purchase of
a home. M&T Bank's
First Home Club similarly matches $4 for every $1 on up to
$1,875 that borrowers put toward a home. Citizens Bank provides something
slightly different in the form of a HomeBuyer
Savings account. This program offers a $1,000 credit toward closing
costs on a Citizens Bank mortgage for account holders who save at least $100
per month for 36 months.
Finding and Qualifying for Down Payment Assistance
Down payment assistance can be a huge help in buying a home, but
not every buyer will qualify. Where you live and how much money you make can
influence eligibility for some down payment assistance programs.
It's easy to miss out on programs you're eligible for if you
don't know they exist. Local real estate professionals can help find down
payment assistance programs available in your area. Check with your state
housing finance agency and local housing authority, too. With Down Payment Resource,
from the lender Mortgage Network, you can get matched with programs you may be
"There are geographical zones and income limits, depending
on those zones and how many people are in the household," says Elysia
Stobbe, a mortgage expert and author of "How to Get Approved for the Best
Mortgage Without Sticking a Fork In Your Eye." Your eligibility criteria
can make a difference in whether you're approved for the program and the level
of assistance you receive.
For example, the Virginia Housing
Development Authority limits homebuyers to a maximum gross
household income based on how many people are in their household and where they
plan to buy. Buyers who are, say, purchasing in the Washington, D.C., suburbs
have a higher income limit than those living in rural areas.
Whether you're a first-time buyer or a repeat buyer can also
make a difference. Just over 60 percent of down payment assistance programs are
geared toward first-time buyers, according to Down Payment Resource. Other
factors that may come into play include:
There may also be guidelines you'll need to observe for the home
itself. For example, certain structures may not be covered or assistance may
not be available for home loans above a certain amount.
"Assistance programs are provided to buy single family homes,
town homes and condos," Mignault says, but they don't always extend to
manufactured homes. And some grant programs may enforce a recapture period,
meaning you have to stay in the home for a set number of years to make the
Pros and Cons of Down Payment Assistance Programs
The main advantage of down payment assistance is that it could
help you buy a home if you don't have cash on hand for a down payment.
"These programs can be a wonderful way to achieve the dream
of home ownership," Stobbe says.
Grants offer the added benefit of effectively being free money,
assuming you meet all the program's requirements and don't trigger a scenario
in which you'd be expected to repay the funds.
There are downsides, however, including the potential for
increased costs. Mortgage programs that offer down payment assistance programs
as a component may charge a higher interest
rate, Stobbe says. "This is dictated by the suppliers of the
program, and they're taking more risk usually because the buyer has little or
no skin in the game."
The North Carolina Housing Finance Agency, for
example, works with participating lenders to offer loans and down payment
assistance to qualifying buyers. Buyers who use the program's down payment
assistance option may pay a rate that's up to 1.75 percent higher for a
In terms of total interest paid, that can make owning a home
substantially more expensive over time and result in a higher monthly payment.
That may present a difficult choice for buyers: Delay buying and save to get a
better rate, or accept a higher rate to buy now with less money down out of
Down Payment Assistance Alternatives
If you don't qualify for down payment assistance, there are
other choices. Asking your parents or other legal relatives to give you money
for a down payment could be an option if they have cash to spare. If you're
going this route, be sure to document the gift thoroughly and follow the rules,
Specifically, down payment gifts must be accompanied by a formal
gift letter that shows who and where the money is coming from. It must specify
that the money is a gift, not a loan. Also, be aware that the amount of money
you can receive for a down payment gift varies based on the loan type.
If you're getting a Federal Housing Administration, Department
of Veterans Affairs or U.S. Department of Agriculture loan, there's no limit on
how much of the down payment can be gifted. The same is true for a conventional
loan with a 20 percent down payment. But, if you're getting a conventional loan
with less than 20 percent down, at least 5 percent of the money has to come
While you're considering down payment gifts, look at the down
payment requirements for different loan types.
"First-time homebuyers can put down as little as 3 percent
in some markets for a conventional loan," Stobbe says, while "3.5
percent is the minimum required for an FHA loan to
qualified buyers." VA
loans can offer 100 percent financing for veterans, while USDA
loans provide the same for income-eligible buyers living in designated rural
A low- or no-down-payment mortgage may sound appealing, but
there's a catch: These loans may come with additional fees at closing or
mortgage insurance when you put less than 20 percent down, which can
inflate your monthly mortgage payment. With a conventional loan, you may be
able to drop PMI once you reach a certain amount of equity in your home. It's
not possible to remove mortgage insurance from new FHA or USDA loans without
refinancing into a conventional loan.
Gifts or low-down-payment loans can help you buy a home, but
don't overlook another obvious path. "There's the good old-fashioned
savings plan that works, too," Stobbe says.
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