Pros & Cons of Mortgage Down Payment Assistance Programs

Is Down Payment Assistance a Good Idea for You?

A smiling couple unlocks the door to a home.
•••

 Maskot / Getty Images

Buying a home is a significant purchase, and the cost of a down payment alone can make it unaffordable for many people. But down payment assistance programs from federal, state, and local governments can help put homebuying within reach. These programs can provide a helpful boost toward long-term financial stability, although they're not ideal for everyone. An assistance plan can include contingencies that can lead to more strain on your long-term finances.

Home prices across the U.S. have been rising, making saving for the cost of a down payment even more challenging for many would-be buyers. Home prices in the U.S. rose 19.1% in October 2021 from the previous year, according to the Case-Shiller U.S. Home Price Index. Let's look at the pros and cons of down payment assistance programs so you can decide if you want to rely on one for your mortgage.

Key Takeaways

  • Down payment assistance reduces the amount you have to save to purchase a home.
  • These programs incentivize the financial stability and wealth-building opportunity of homeownership.
  • They have some downsides, such as restrictions and eligibility requirements.
  • Down payment assistance may not be the best fit for everyone's personal circumstances.

How Does Down Payment Assistance Work?

Down payment assistance programs help homebuyers meet the down payment criteria for getting a mortgage.

Buyers can use down payment assistance programs to help cover the cost instead of paying the full required down payment. Lenders usually ask for a down payment of at least 3%, and many require more than 5%. The more you put down, the more affordable your mortgage becomes. You'll save the most if you put down at least 20%.

How much assistance you qualify for and how you'll receive the funds depends on how the particular program is structured.

Some programs provide payment vouchers and require that you pay back the assistance if you sell the house after only a few years. Others may prohibit you from selling your home until after you've lived there for a certain period of time. Still others have more restrictions, such as "gap financing." This means that the assistance is an additional loan that you'll have to repay eventually.

Pros and Cons of Down Payment Assistance Programs

Down payment assistance programs can be a significant advantage for those who are ready to buy a home but don't have enough money saved for a large down payment. But these programs can also have some drawbacks.

Pros
  • Easier to afford a home

  • Help some people get financing

  • May offer access to lower rates

  • May not require repayment

  • May avoid private mortgage insurance

Cons
  • Can add financial stress later

  • May come with residency restrictions

  • Have strict eligibility requirements

  • Slower closing process

Pros Explained

  • Easier to afford a home: The main benefit of down payment assistance is that it helps homebuyers afford homes because they don't have the burden of having to save for a down payment. Saving enough could take many years.

Even a small amount of down payment assistance can potentially provide the money you need to help you move from renting to homeownership. A U.S. Department of Housing and Urban Development (HUD) study found that even $1,000 in down payment assistance could motivate as many as 700,000 low-income households to buy a home.

  • Help securing financing: A larger down payment bolstered by down payment assistance can be enough to secure a mortgage for someone who would otherwise be denied. Lenders require a down payment to help minimize their risk. They evaluate borrowers based on the amount of their down payment along with other factors such as income, credit history, and the amount they want to borrow. A higher down payment reduces the lender's risk by lowering the loan-to-value ratio.
  • May offer access to lower rates: Lenders may offer you a lower interest rate with a larger down payment. They typically consider the size of your down payment in increments of 5% when they determine your interest rate and loan costs.

You could save money on your long-term loan costs if assistance boosts the size of your down payment up to 10% from 8% so that the lender offers a lower interest rate.

  • May not require repayment: Some down payment programs don't require repayment. Grants can provide money that can help you qualify for a mortgage. You would not have to repay the money if you abided by the terms, such as living in the home for a certain period of time.
  • May avoid private mortgage insurance: You won't have to pay a monthly premium for private mortgage insurance (PMI) if you can pay more than 20% of the home price as a down payment. Down payment assistance can be in the form of an interest-free loan in some cases, which can provide the upfront payment you may need at no additional long-term costs.

Cons Explained

  • Can add financial stress later: Maybe you can afford to buy a home without the assistance, but you could buy a more expensive home with the assistance. Think carefully about the long-term financial impacts of choosing assistance in this case. Many down payment assistance programs require that you repay the funds. Consider your personal budget when you're deciding whether to accept this type of help.
  • May come with residency restrictions: Some down payment assistance programs are structured with pay-back requirements if you sell and move before a certain time, such as 10 years. Consider how long you want to live in the property as your primary residence. It may be worthwhile to turn down assistance and find other ways to secure a mortgage if you plan to move during the term.
  • Have strict eligibility requirements: Eligibility requirements for down payment assistance are often tied to your first-time homebuyer status, as well as your income, credit score, or the price or location of your home. Check to make sure that the terms of your down payment assistance program won't change as well if your circumstances change before you secure a mortgage. You may no longer qualify for your assistance loan if your income increases during the course of your home purchase.

Certain loan programs that offer low or no down payments can have their own eligibility requirements, such as those designed for veterans or buyers in rural areas.

Slower closing process: Every additional step in the loan closing process can create delays that could potentially jeopardize your purchase. Make sure that the benefits of down payment assistance are worth possibly slowing down the closing process, and that everyone involved understands that your down payment assistance could add complexity and take more time.

Alternatives to Down Payment Assistance

You can look into a number of alternatives that might help you achieve the down payment you need if down payment assistance isn't the right fit for you. Support from friends or family could include a cash gift or a person-to-person loan, but make sure your mortgage allows you to make a down payment with borrowed funds. In-kind assistance, such as receiving an inexpensive or free place to live in someone else's home, can help you save for your down payment.

You could sell assets like a car, stocks, or other valuable items for cash for your down payment.

Setting a specific savings plan can help you reduce your costs and reserve more funds for a down payment. Your plan might include eliminating vacations or eating out.

The Bottom Line

Down payment assistance programs offer valuable benefits for first-time homebuyers or lower-income borrowers who need help affording a down payment. But assistance programs come with specific requirements, so they're not suited for everyone.

You might be better off without the assistance if you plan to sell your home quickly or if you can qualify for a low interest rate on your own. Evaluate all your options by considering the eligibility requirements and the long-term impacts.

Frequently Asked Questions (FAQs)

How long does it take to get down payment assistance?

The length of time to get approved can vary by program. You can minimize the impact on your closing time by applying for assistance as soon as possible, and by updating the assistance provider when you've found a home and it's under contract.

How do I qualify for down payment assistance?

Down payment assistance is typically for first-time homebuyers. You can also qualify for programs aimed at low- to middle-income borrowers in which you'd have to meet income requirements. Each local, state, or federal program will have its own criteria. You'll need a minimum credit score to qualify for any down payment assistance in most cases.

Article Sources

  1. S&P Global "S&P CoreLogic Case-Shiller Index Reports 19.1% Annual Home Price Gain in October."

  2. Consumer Financial Protection Bureau. "Determine Your Down Payment."

  3. DC.gov. Department of Housing and Community Development. "Home Purchase Assistance Program (HPAP)."

  4. Department of Housing and Urban Development. "The Potential of Downpayment Assistance for Increasing Homeownership Among Minority and Low-Income Households," Page vi.

  5. Consumer Financial Protection Bureau. "What Is a Loan-to-Value Ratio and How Does It Relate to My Costs?"

  6. Consumer Financial Protection Bureau. "How To Decide How Much To Spend on Your Down Payment."

  7. West Valley City, Utah. "West Valley City Down Payment Assistance (DPA) Grant Program," Pages 1-3.

  8. Consumer Financial Protection Bureau. "What Is Private Mortgage Insurance?"

  9. The City of Santa Ana. "My First Home Program."

  10. South Carolina State Housing Finance Authority. "Homebuyer Program Why Rent When You Can Buy?"

  11. Kentucky Housing Corporation. "Future Homebuyers - Down Payment Assistance."

  12. Federal Deposit Insurance Corporation. "Down Payment and Closing Cost Assistance."