Purchasing a home is exciting, but for many first-time and young buyers, one obstacle stands in the way: a down payment. Among millennials who want to buy a house, 70% said they can't afford to, according to a 2019 report by the rental website Apartment List. The good news is that homebuyers can get help.
"The down payment is often the biggest hurdle to homeownership. Saving enough could take years," says Kendra Barnes, licensed real estate agent and owner of The Key Resource, an online guide to real estate investing. "Down payment assistance programs help renters get over that hurdle and make homeownership more attainable."
You could consider a program if you're hoping to become a homeowner but struggling to come up with your down payment. You'll need to know the rules for assistance, including who qualifies, and the pros and cons.
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How Do Down Payment Assistance Programs Work?
Down payment assistance programs provide would-be homebuyers with money to cover some or all of a down payment, and some programs offer help with closing costs. Assistance can come from many sources, including government agencies and nonprofits, and isn't always well-publicized.
Programs vary based on where you plan to buy a home. In Texas, for example, the Department of Housing and Community Affairs offers down payment and closing cost assistance of up to 5% of the loan amount for eligible buyers.
Generally, down payment assistance takes one of three forms:
-- Down payment assistance grants.
-- Forgivable second mortgage programs.
-- Matched savings programs.
Down payment assistance grants. These grants provide buyers with down payment and closing cost funds that don't have to be repaid until the home is sold. Just two examples are the National Homebuyers Fund and the PenFed Foundation's Dream Makers Military Heroes Fund.
The former gifts up to 5% of the loan amount to borrowers, and the latter offers up to $5,000 toward down payments for qualified service members.
Forgivable second mortgage programs. If you don't qualify for a down payment grant program, you could pursue a second mortgage that is forgiven after you meet certain requirements. You might have to live in the home for a certain amount of time, for example.
The State of New York Mortgage Agency offers a down payment assistance loan that can be used with the agency's mortgage program and charges no monthly payment. The loan is forgiven after 10 years, unless you sell the home or refinance the mortgage before then.
Matched savings programs. Savings deposited in these special accounts are matched by banks, perhaps partnered with nonprofits or government agencies. The idea is to help aspiring buyers build a down payment.
Indiana's Individual Development Accounts match at least $3 for every $1 consumers save. Citizens Bank, however, provides something slightly different with its HomeBuyer Savings account. By saving at least $100 monthly for 36 months, you can earn a $1,000 credit toward closing costs on a Citizens Bank mortgage.
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Who Qualifies 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 may influence your eligibility for some down payment assistance programs.
"There are geographical zones and income limits, depending on those zones and how many people are in the household," says Elysia Stobbe, author of "How to Get Approved for the Best Mortgage Without Sticking a Fork In Your Eye."
The Virginia Housing Development Authority's down payment assistance grant, for example, sets limits on household incomes, and buyers must meet a number of other requirements.
How well you fit the criteria can determine not only whether you're approved for a program but also how much help you receive. Some programs are geared toward first-time buyers, and others allow repeat buyers.
Other eligibility factors could include:
-- Credit score.
-- Military or veteran status.
-- Employment in public service.
-- Whether you've completed a homebuyer education program.
Programs may also set limits on home prices and restrict property types.
"Homes that will be owner occupied qualify for down payment assistance programs," Barnes says. "Most down payment assistance programs also work for multiunit properties, as long as the buyer will be living in one of the units."
Generally, rental and investment properties don't qualify for down payment assistance.
How to Apply for Down Payment Assistance
If you're ready to buy a home and want to use down payment assistance, here are the steps to take.
Explore down payment assistance programs for your state. Each state has a housing finance agency, or HFA, that oversees the affordable housing needs of residents. Locate your state's HFA website using this directory from the National Council of State Housing Agencies, and search the site for homebuyer programs.
Check for county or city programs. Southern California's San Diego County, for instance, provides eligible buyers in the city of La Mesa up to $70,000 in down payment assistance.
How to find help near you: The Department of Housing and Urban Development lists local home homebuying programs by state. Simply select your state, and then click on "Assistance programs" under "Buying a Home" to pull up the programs in your area.
Review program requirements and gather documents. Once you've selected a program, you can collect the paperwork you will need for the application. In addition to ID, such as a driver's license or Social Security card, you might need to provide:
-- Pay stubs.
-- Bank statements.
-- Employment history.
-- Recent tax returns.
Submit a mortgage application with an approved lender. You'll want to borrow from a lender that participates in the down payment assistance program you have chosen and is knowledgeable about it.
Typically, the program website recommends lenders, or you can select your state from this U.S. News map to explore the best mortgage lenders near you.
If you're approved for a mortgage, the lender will work with the program administrator to obtain the program funds. Turnaround times for this process vary, and it can delay closing.
Pros and Cons of Down Payment Assistance Programs
You'll want to weigh the pros and cons of a down payment assistance program before using one.
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 homeownership," Stobbe says.
A grant is effectively free money, assuming you meet all of the program's requirements.
The trade-off is that mortgage programs with down payment assistance may charge higher interest rates than borrowers would pay otherwise, 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," she says.
Buyers who use the North Carolina Housing Finance Agency's loan program, for example, pay higher rates by opting for down payment assistance. That might mean paying not only a higher mortgage payment but also more in interest over the life of the loan.
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Down Payment Assistance Alternatives
If you don't qualify for down payment assistance, you could ask family members for gift money toward a down payment or explore loans with no or low down payments.
If you plan to use gift funds toward a down payment, you will need a gift letter stating the donor's name and that the money is not a loan. Also, be aware that some loans may have limits on how much gift money you can use toward a down payment.
If you're putting down less than 20% on a conventional loan, some of the money has to come out of your own pocket. But loans backed by the Federal Housing Administration, U.S. Department of Veterans Affairs or U.S. Department of Agriculture allow any amount of gift money with proper documentation.
While you're considering down payment gifts, look at the down payment requirements for different loan types. VA loans offer 100% financing for veterans, and USDA loans provide the same for income-eligible buyers in certain rural areas.
"First-time homebuyers can put down as little as 3% in some markets for a conventional loan," Stobbe says, while "3.5% is the minimum required for an FHA loan to qualified buyers."
Mortgages with no or low down payments may sound appealing but have a catch: These loans may come with added fees at closing or require private mortgage insurance. The latter can inflate your monthly mortgage payment.
Yes, a low-down-payment loan or gift can help you buy a home, but don't overlook another obvious path. "There's the good old-fashioned savings plan," Stobbe says.