Pros & Cons of Down Payment Assistance Programs for Mortgages
No down payment? No problem.
Down payment assistance programs (DPAs) help homebuyers offset or, in some cases, fully cover the cost of the down payment when purchasing a home. Most of these programs are offered through state-run housing finance agencies.
The requirements for these programs typically focus on the borrower’s credit score, income, and the price of the home they want to buy. DPA income requirements cap the maximum income allowed based on the area median family income or other metrics. As such, the programs are a good fit for low- and median-income homebuyers.
An Example: Texas Down Payment Assistance Programs
Texas offers a handful of down payment assistance programs that may be a barometer of help available in your area. Keep in mind, though, your exact options will depend on your state and municipality.
The Texas State Affordable Housing Corporation (TSAHC) and the Texas Department of Housing and Community Affairs (TDHCA) both offer down payment assistance programs. The TSAHC’s DPA loan program functions as a second mortgage, though borrowers are not required to make monthly payments on the loan and no interest is due. As long as borrowers stay in the home for at least three years, they do not need to repay the loan.
TSAHC also offers two DPA grant programs, both of which do not need to be repaid: the Homes for Texas Heroes program (reserved for teachers, police officers, and other public servants) and the Homes Sweet Texas program. Additionally, the TDHCA offers DPA options through programs like My Choice Texas Home and My First Texas Home. The latter is reserved for first-time homebuyers, veterans, or those who have not owned a home in the last three years.
Not all DPAs are payment- and interest-free, as the above options in Texas are. Sometimes, DPA loans carry interest rates and require regular payment.
Pros of Down Payment Assistance Programs
The primary benefit of DPAs is that they can allow lower- and middle-income buyers to more easily afford a home. With the help of a down payment assistance program, buyers need less cash up front and can typically buy a home quicker, as it requires less time spent saving up.
DPAs may also help these buyers when applying for mortgage financing. Most loans have down payment requirements in order to qualify. FHA loans, for example, require anywhere from 3.5% to 10% of the purchase price as a down payment (it depends on the borrower’s credit score and other factors). On a $200,000 home, that would mean an upfront payment of $7,000 to $20,000—a significant financial hurdle for many buyers.
Finally, down payment assistance programs may also qualify buyers for a lower interest rate on their first mortgage, since it reduces the risk the lender takes. In Texas, for example, the TSAHC’s second-lien DPA loan does this. Qualifying borrowers enjoy a lower interest rate (and less interest paid over the life of the loan) just by taking advantage of the DPA program.
Cons of Down Payment Assistance Programs
If a down payment assistance program is forgivable—meaning the buyer does not need to repay the balance as long as they stay in the home for a certain amount of time—then there are few drawbacks, as long as they can comfortably afford the mortgage payment and maintenance costs that come with the property.
With DPAs that charge interest and require repayment, though, it could create added financial stress—particularly for lower-income borrowers. These loans mean a second monthly payment, as well as greater long-term interest costs. In some cases, down-payment assistance programs come with restrictions as to when and how the home can be sold or transferred in the future.
Finally, there tend to be very strict eligibility requirements for DPA programs. Many DPAs are reserved for lower-income buyers, first-timers, veterans, public servants, and other categories. Additionally, funding for DPA grants is limited, so they operate on a first-come, first-served basis.
- Down payment assistance programs can help offset or cover entirely the costs of your down payment.
- They come as either loans or grants. Some loans are forgivable, have no interest rate, and do not require repayment as long as you meet certain requirements.
- Most DPAs have strict qualifying requirements. You may need to be a first-time homebuyer, fall under a certain income threshold, or be a veteran or public servant in order to be eligible.
- DPAs are location-specific. Check with your state or local housing agencies to see what down payment assistance programs might be available in your area.
FDIC."Down Payment and Closing Cost Assistance." Page 1. Accessed May 19, 2020.
Texas State Affordable Housing Corporation. "Home Buyer FAQ." Accessed May 19, 2020.
Texas State Affordable Housing Corporation. "Loans and Down Payment Assistance." Accessed May 19, 2020.
Texas Department of Housing and Community Affairs. "My First Texas Home Program." Accessed May 19, 2020.
U.S. Department of Housing and Urban Development. "Federal Housing Administration Annual Report to Congress." Page 52. Accessed May 15, 2020.
Federal Deposit Insurance Corporation. "Down Payment and Closing Cost Assistance." Accessed May 19, 2020.