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.
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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 lender.
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:
-- Down payment grants
-- Forgivable second mortgage programs
-- Matched savings programs
Down 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.
Forgivable 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 home.
Matched 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 eligible for.
"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:
-- Your credit score
-- Your debt-to-income ratio
-- Whether you've completed a homebuyer education program
-- Military or veteran status
-- Employment in a public service position
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 grant nonrepayable.
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 mortgage.
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 pocket.
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, says Mignault.
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 from you.
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 areas.
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 require private 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.