How to Get Down Payment Assistance

How Does Down Payment Assistance Work?

Buying a home is often the largest purchase a person will make in their lives. Unless you're one of the lucky few who can buy a home outright with no need for a mortgage loan, you'll need to have at least some money on hand for a down payment. A down payment shows lenders you are committed to the purchase by putting your own money on the line.

Lenders may require a certain amount for a down payment, which is usually a percentage of the purchase price. For example, if you were buying a home that cost $200,000 and your lender required you to put 10% down, the down payment would be $20,000. Even utilizing government-backed mortgages intended to help low-income or first-time homeowners, you may still be required to put some money down (such as 3.5% for an FHA loan). The good news is there are many programs designed to help potential homeowners cover the down payment.

Almost all down payment assistance programs are provided through the federal government at the state level. Sometimes local nonprofits may partner with the government to provide homebuying education or distribute money for down payment help; however, the funding still flows down from the federal government. There are other institutions that provide down payment assistance too. (More on that later.)

Down payment assistance programs fall into four general categories:

• Grants: This is money that you don't have to pay back. If you can get a grant to cover your down payment, that's the most ideal scenario.
• Deferred payment loans: This is a second mortgage you can take out to cover the down payment costs on the home you're purchasing. It's called a deferred payment loan because you don't have to pay back the money unless you move, sell or refinance your first loan. That said, these loans are never forgiven.
• Low-interest loans: A low-interest loan is also a second mortgage. The difference between this and a deferred payment loan is that you have to start making monthly payments on this loan right away, usually at the same time you make your regular monthly mortgage payments.
• Forgivable loans: A forgivable loan is another type of second mortgage. You won't have to pay this one back unless you move before your loan term ends. These loans usually come with an interest rate of 0%.

Once you find a down payment assistance program you think you may qualify for, you'll need to find out if your lender works with the program (or seek out other lenders that do).

Who Qualifies for Down Payment Assistance?

To qualify for down payment assistance, you usually need to be a first-time homeowner (defined as someone who hasn't owned a home within the previous three years) and meet other requirements, like income limits. Income limits are the maximum amount of income a household can receive to be eligible for assistance. Income limits vary depending on the program you're considering, where you live and how large your family is. Certain programs may also have debt-to-income ratio (DTI) requirements. Additionally, some down payment assistance programs target specific groups of people, such as teachers, veterans and police officers.

Credit requirements may be more relaxed for down payment assistance programs than for typical mortgage approval. That said, if you have a credit score below 620, you'll want to work on improving your score to give yourself the best shot at qualifying for down payment assistance. If you're not sure where your credit stands, you can get your free credit report and score from Experian to see where you're at and how you might improve.

How to Apply for Mortgage Down Payment Assistance

Requirements and processes for applying for down payment assistance vary by state, by the organizations offering assistance and by lender. If you've found a lender you want to work with, they may be able to refer you to state and local resources. Here are other good places to start:

• Federal Housing Administration (FHA) down payment grants programs: The FHA provides a list of specific grants and programs for buyers in need of down payment assistance.
• HUD local homebuyer programs: The U.S. Department of Housing and Urban Development offers an extensive list of resources that can help you find and apply for programs in your area that may offer down payment assistance and other homebuying resources. Programs may also provide a list or recommendations of approved lenders.

Once you've connected with an approved lender and determined you're eligible for a down payment assistance program, follow the instructions set out by the lender and program or agency to apply for assistance.

Pros and Cons of Down Payment Assistance

The biggest pro of getting down payment assistance is the possibility of receiving free money or low-cost financing to help offset the expense of a large down payment. Interest rates on down payment assistance loans can be as low as 0%, and the debt may even be forgiven in certain instances.

There aren't too many downsides to getting down payment assistance, although there are some things to consider:

• Many programs might require you to attend an educational homebuyer class or workshop to be eligible for funding, adding extra time in the homebuying process.
• If you get down payment assistance in the form of a second mortgage, you may have to repay it if you move, sell your home or refinance your primary mortgage loan.
• Some programs have sales price limits, meaning you can only buy a home in a specific price range. Depending on where in the U.S. you live—especially if you live in a more expensive area—this could limit your choices in homes.

Alternative Ways to Get Help Buying a House

In addition to seeking out down payment assistance programs, first-time homebuyers have other programs and resources that can help them navigate the homebuying process:

• Government-backed loans and programs: Find out if you qualify for any other types of federal or local programs designed to help you buy a home. You may be eligible for government-backed loans, such as an FHA loan, which can help you buy a house with as little as a 3.5% down payment; a USDA loan, which requires no down payment for low-income buyers in suburban and rural areas; or a VA loan from the U.S. Department of Veterans Affairs. You may also want to check out HUD's Dollar Homes program aimed at low-income borrowers. With this program, you could be eligible to buy a foreclosed home for just $1 plus closing costs.
• Work with an experienced real estate agent. They can often point you in the right direction for lenders who are a good fit, connect you to useful resources, and generally help you navigate what can be a complex journey. You can find a real estate agent through family and friend recommendations or real estate websites such as Realtor.com.

The Bottom Line

Especially for first-time homebuyers, it can be hard to save up enough money for a substantial down payment. Down payment assistance programs help fill that gap by covering all or part of the cost. When looking for programs to apply for, research their requirements, understand whether it's a grant or loan, and get specifics on how much assistance you can receive. No matter what, with the right knowledge and resources, buying a home can be within your reach.