Using Down Payment Assistance on Your Next Mortgage Loan
Help is available if you meet certain guidelines and know where to look
The days of easy credit and 100% financing might be behind us, but down payment assistance (DPA) programs are alive and well. They survived the credit meltdown, and they still provide a valuable service for stimulating local housing markets.
From down payment assistance grants to interest-free second mortgages and other special mortgage programs, would-be homebuyers have a number of options You can buy a home without depleting all your assets, or maybe you just don't have those assets in the first place. Buyers can earn as much as 120 percent to 140 percent of their area's median income and still qualify for some programs.
What Types of Assistance Are Available?
Down payment assistance comes in many forms, but the most common sources are:
- Community grants
- State housing agencies
- Local housing agencies
- Lender-specific community reinvestment act programs
- Fannie Mae (Federal National Mortgage Association; FNMA)
- Freddie Mac (Federal Home Loan Mortgage Corporation; FHLMC)
- Federal Housing Administration
- VA loans
- USDA loans
There are more, but these represent the vast majority of available programs and are a great place to start your search. Some lenders, including TD and Fannie Mae's HomeReady program, have their own in-house programs, and they might pay your closing costs as well as your down payment.
Assistance Grants vs. Assistance Loans
The major difference between grants and loans is that grants generally don't have to be repaid unless you sell or leave the property within a certain period of time, usually about three years.
Loans must be paid back, of course, but they're often interest-free and you won't necessarily be adding another payment to your monthly budget. You might not have to repay the loan until your first mortgage is paid off or you sell your home or otherwise relocate. And any interest that is charged is often nominal.
How Do You Qualify?
Program guidelines can vary from product to product, but some are pretty standard. In most cases, you must:
- Be a first-time homebuyer, which generally means you haven't owned a home in the last three years. You might also qualify for some programs if you've been divorced or displaced for another reason.
- Occupy the property as your primary residence. Nonoccupant co-borrowers are typically not allowed.
- Complete homebuyer education counseling and obtain a certificate of completion through an eligible homebuyer counseling organization.
- Meet the requirements of the lender and the mortgage insurer/guarantor.
- Income must fall within the program’s limits.
- Your desired home's price must fall within the program’s limits.
This list is not all-inclusive, and all these restrictions will not be applicable to every down payment assistance program. But you might encounter a lot of them, so be aware and be prepared to satisfy these conditions if necessary.
You can be approved for assistance automatically simply because your lender participates in a program for which you meet the guidelines. Otherwise, don't expect lenders to inform you of these loan and grant options; they often result in less income for lenders on the loans they make. Don't be afraid to ask about these DPA programs; they are in place for people who need them.
How Can You Take a Homebuyer Education Class?
Homebuyer education is critical to any homeowner's success and happiness. Although such courses are not required for all down payment assistance programs, being prepared is always a good step.
You can often take a course online through a number of accredited education providers. You can also attend classes in person at Homebuyer Education through NeighborWorks America or any housing counseling agency approved by the U.S. Department of Housing and Urban Development (HUD).
Where Can You Find Available Programs?
Start your search for down payment assistance with your state's housing agency. State housing departments offer the bulk of the DPA programs. Your local housing agency—county or city—is also a useful resource. Community grant programs can often provide the best deals for low- to moderate-income homebuyers.
HUD also has some quality information on down payment assistance programs that work with U.S. Federal Housing Administration (FHA) mortgage loans. In fact, HUD's website can be another good place to begin your search; there you'll find lists of grants made available in each state.
The Nehemiah Community Foundation has compiled one of the most comprehensive down payment assistance program databases in the country to help reduce your barriers to homeownership. The database includes first-time homebuyer and general assistance programs.
Ultimately, however, your mortgage lender will have the final say. Not all lenders offer or accept all programs, so check with a loan officer to make sure your lender can help you with the down payment assistance program you're hoping to pursue.