Many people who are in the market to buy a house are facing challenges when it comes to gathering the down payment. This obstacle could potentially stand in the way of owning a home, even if they can afford the monthly mortgage payments, not having the down payment may prevent them from purchasing a house.
However, there is assistance available for potential homebuyers. There are programs out there that can help them with the down payment. The challenge lies in finding the right program that fits their individual circumstances.
Down Payment Assistance (DPA) programs provide financial assistance to potential homebuyers to help with the down payment or closing costs.
These programs offer grants or low-interest loans to reduce the upfront cash needed to purchase a home. Some DPAs offer forgivable loans or cash grants. While some do not require repayment, others may require low or zero-interest repayment.
According to data from Down Payment Resource, there are 2000 homeownership programs nationwide, with down payment assistance accounting for 75% of available programs. Many are managed by state, county, and city governments, offering thousands of dollars to qualifying buyers. FHA.com provides a list of state-specific programs available.
While specific rules may vary, most require low to moderate income, good credit scores, and being a first-time homebuyer.
Other requirements include:
The exact criteria for eligibility for assistance programs depend on where you live and whether the property meets the requirements.
Start by contacting housing counselors. These counselors can help you make informed decisions based on your financial situation and needs. Their services are often low-cost or free. The Department of Housing and Urban Development (HUD) has a list of approved housing counseling agencies.
Another way to find down payment assistance is through Fannie Mae. Fannie Mae partners with Down Payment Resource to help you find assistance for down payments and closing costs. Fannie Mae also offers a down payment assistance tool.
The private down payment assistance program recommended by the Federal Housing Administration (FHA) is the Chenoa Fund. Funded by CBC Mortgage Agency, the Chenoa Fund uses FHA-insured home loans to offer eligible applicants 3.5% of the purchase price to cover the down payment.
This assistance is provided in the form of a zero-interest second mortgage loan with a 30-year term. If the borrower makes timely payments on the primary mortgage for 36 consecutive months, the second mortgage loan will be forgiven.
Most down payment assistance programs are geared towards first-time homebuyers. They come in the form of grants and loans. In addition to local and federal programs, there are also some private and nonprofit funds available.
Some of these grants are considered as second mortgage loans, sometimes involving taking out a second mortgage loan. Failing to disclose this to the lender is illegal and could lead to legal repercussions. Make sure to carefully read the terms of the grant or any down payment assistance before signing.
Buyers have several forms of assistance available.
Grants provide funds that do not need to be repaid. They are essentially gifts.
However, some organizations offering funds referred to as grant programs may actually create a second lien on your home.
While this may not be inherently wrong, you should be aware of the type of deal you are getting into. Make sure your lender is aware of this grant. Failure to do so may result in ending up with a “silent” mortgage.
Forgivable loans are second mortgage loans. As long as you live in the house for a set number of years, you do not have to repay these loans.
Most lenders forgive the loan after five years of residency. However, they may choose to set the forgiveness period to 15-20 years. If you sell the house before the specified period, you will repay the loan at zero interest.
Deferred loans are second mortgage loans with deferred payments. These are loans that do not need to be repaid until you move, refinance, or pay off the primary mortgage.
These loans are never forgiven; you must repay them if you sell your home.
An organization or your lender may offer you a second mortgage loan when you take out the first mortgage loan. You then use the funds from the second mortgage loan as the down payment for the first or primary mortgage.
You will have to repay the low-interest loan in installments. This means you will have two mortgage payments each month. Ideally, you would want a low or zero-interest loan.
Matched savings accounts, also known as Individual Development Accounts, help potential homeowners with the down payment.
Potential buyers deposit money into a bank, community organization, or government agency. The organization agrees to match the deposited amount. Then, the buyer can use all the funds as the down payment.
Contact HUD-approved housing counselors to see which option may be suitable for you if you need down payment assistance. Many states and local governments have programs that can assist you.