Given the shortage of affordable housing options across the U.S., down payment assistance programs offer a lifeline to homebuyers who are looking for some type of financial support. As housing prices continue to rise, the dream of homeownership seems increasingly out of reach for many low- to moderate-income families. Fortunately, down payment assistance programs provide the required support by making homeownership more affordable.
Various local and state housing agencies, nonprofit organizations, and private-sector lenders offer down payment assistance (DPA) programs. These programs typically come in the form of loans and grants, and you get to use the funds you receive to cover your home’s down payment. While some down payment assistance programs let you use the funds you receive to cover closing costs, others might prohibit you from doing the same.
There are more than 2,000 programs available nationwide, and each program varies depending on its location and its source of funding. Some of these programs give priority to first-time homebuyers, and others favor specific groups such as teachers, healthcare workers, and veterans.
Down payment assistance programs come in different forms and might have unique requirements. Here are the most common.
This type of assistance typically comes in the form of a grant, especially when the amount is relatively small (usually lower than $5,000). Down payment assistance grants help bring down administrative costs associated with getting a mortgage. More often than not, you don’t have to repay the money you receive through a grant.
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With a matched-savings program, you typically need to hold your savings in an individual development account (IDA) with a bank, community organization, or government agency. The institution in question then matches your deposit amount. For example, if you deposit $2,500 in your IDA, you’ll receive $2,500 from the participating institution that you may use to cover your down payment. You don’t have to repay the funds you receive through a matched-savings program.
A forgivable loan functions as a second mortgage that does not require repayment provided the homeowner stays in the home for a predetermined number of years. These loans come with 0% interest, and lenders typically forgive them after five or more years. However, if a homeowner moves or sells a property before the end of the forgiveness period, he/she may need to repay all or part of the borrowed amount.
For example, if your lender requires that you live in the home for a minimum of 10 years but you move out after seven years, it’s likely you’ll need to repay a portion of the loan. The money you receive through forgivable down payment assistance is usually enough to cover a home’s down payment entirely.
This type of assistance might require that you make regular repayments or your lender may choose to defer payments until you sell the home. The terms and conditions vary depending on the agreement between a homebuyer and a lender.
Under this model, you receive all or a portion of the down payment amount. You need to share a small percentage of the home’s appreciated value upon its resale, and you also need to repay the entire down payment loan amount.
Apartment List’s Millennial Homeownership Report for 2022 points out that affordability has become a major concern for millennials making housing-related decisions.
It indicates that close to two-thirds of millennials who wanted to buy homes in 2021 had no savings at all, and only 15% said they had saved in excess of $10,000. Even this amount is considerably lower than the median down payment amount on single-family homes bought using financing in the first quarter of 2023, which stood at $26,250.
It’s fair to say that the inability to make a down payment stands in the way of several potential homebuyers. Fortunately, buyers don’t necessarily have to make a 20% down payment because different types of mortgages have varied down payment requirements. Besides, down payment assistance programs can help bring them one step closer to their homeownership dream.
Most down payment assistance programs typically cater to first-time homebuyers. However, repeat buyers have a few options too, provided they have not owned a home or more in the preceding three years. Not everyone qualifies for down payment assistance because each program comes with its own set of rules and eligibility criteria. These guidelines tend to remain the same.
Remember that down payment assistance programs tend to come with their own nuances, and eligibility criteria may vary based on the program you select and where you live. Buying a home in some areas might make you eligible to qualify easily and even get more money. You may get information about these areas from your real estate agent or mortgage provider.
While there are a few national down payment assistance programs, most are run at the state, county, or city level. One way to look for DPAs is to ask your loan officer, as he/she should ideally have the required information about local and acceptable options. In addition, you may carry out an online search by using the name of the state, country, and city in which you reside.
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Bear in mind that agencies, organizations, and institutions that offer down payment assistance programs usually refrain from spending funds on advertising because of which not many people get to know about them. The U.S. Department of Housing and Urban Development (HUD) provides information about local home buying programsin different states, but it does not offer a comprehensive list of all the down payment assistance programs in the country. As a result, it’s imperative that you carry out a thorough search based on where you live.
Before you apply for any DPA, it’s important to go through its terms and conditions to determine if they align with your goals. For instance, some might require that you live in the house you purchase for a predetermined time period, and others might need you to get a Federal Housing Administration (FHA) loan. In addition, applying for down payment assistance may slow down the home buying process.
Almost every down payment program has its own guidelines and there is no uniformity in the amount you may expect. While some provide a fixed amount, others provide a percentage of the home’s purchase price up to a predetermined maximum limit.
The Down Payment Assistance Loan (DPAL) offered by the State of New York Mortgage Agency (SONYMA) covers 3% of a home’s purchase price (maximum of $15,000). The HomeFirst Down Payment Assistance Program, on the other hand, offers up to $100,000 to cover down payment or closing costs if you plan to purchase a home in any of New York’s five boroughs.
Depending on the location of the house you wish to purchase, you may receive a few thousand dollars or considerably more. The program you select will also have a bearing on whether or not you need to repay the funds you receive.
If you wish to apply for down payment assistance, there’s a good chance you’ll need to work with an approved mortgage provider. In some instances, you might have to get a specific type of mortgage. More often than not, down payment assistance programs cover all popular mortgage types. These include:
A big misconception about the home buying process is how much money one needs for the down payment. According to a post published on the National Association of REALTORS website, 35% of homebuyers feel they need to make a down payment of 16% to 20%, whereas 10% feel they need more than 20%. In reality, you might not need to make any down payment if you qualify for the right type of mortgage.
Here are down payment requirements for different types of mortgages:
The same National Association of REALTORS post indicates that first-time home buyers have typically paid a down payment of 6% to 7% since 2018, although the average down payment for repeat buyers increased from 13% in 2014 to 17% in 2021.
You need to pay due attention to every aspect of the home buying process, and getting down payment assistance is no different. While qualifying for down payment assistance comes with benefits, there are possible drawbacks you need to be aware of as well.
If you wish to buy a home but don’t have enough money to make a down payment, you may take a look at what different down payment assistance programs have to offer. These typically come in the form of one-time grants, matched-savings programs, forgivable loans, and low interest loans. Bear in mind that the availability of these programs depends largely on where you live, and their eligibility criteria tend to vary as well. If you’re unsure about the programs for which you may qualify, asking your mortgage provider might be the way to go.
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