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Down Payment Assistance: A Guide to Programs

Miranda Crace10-minute read

November 19, 2020

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Worried that you can’t afford a down payment on a home? Here’s some good news: If you’re a first-time home buyer, you might qualify for down payment assistance provided through a government agency or private organization.

Here’s a look at the different down payment assistance programs to consider when you buy your first home. We’ll cover what exactly a down payment assistance program is and how you can take advantage of one if needed.

What Is Down Payment Assistance?

When you buy a home, you’ll usually have to make a down payment – a lump of cash equal to a percentage of your home’s final purchase price. The amount you’ll need will vary and some mortgage programs require no down payment at all. While there are variations, coming up with this cash is often a difficult hurdle for buyers.

Qualifying As A First-Time Home Buyer

Most government and charity programs have strict definitions for who qualifies as a first-time home buyer. If you haven’t had any kind of homeownership in the last 3 years, most state, federal and nonprofit programs consider you a first-time buyer, even if you owned a home before that 3-year period. You cannot own any form of rental or investment property and get first-time home buyer down payment assistance, even if you don’t live in the property.

Consider that a down payment of 5% on a home costing $200,000 comes out to $10,000. That’s a lot of money for first-time home buyers to scrape together.

That’s where down payment assistance programs come in. As the name suggests, down payment assistance helps you cover your down payment. The money can come from local charities, state and federal government bodies or individual mortgage lenders. In some cases, your labor union or employer can also provide you with down payment assistance, especially if you can’t rely on other solutions (such as adding a co-signer to your mortgage) to get into a home.

Qualifying As A First-Time Home Buyer

Most government and charity programs have strict definitions for who qualifies as a first-time home buyer. If you haven’t had any kind of homeownership in the last 3 years, most state, federal and nonprofit programs consider you a first-time buyer, even if you owned a home before that 3-year period. You cannot own any form of rental or investment property and get first-time home buyer down payment assistance, even if you don’t live in the property.

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Types Of Down Payment Assistance

Most assistance comes in the form of first-time home buyer grants and loans offered at the state and local levels. There may even be funds available from the private sector and nonprofits where you live.

Grants

The most valuable form of down payment assistance? That would be grants. That’s because grants provide money that homeowners never have to repay – they’re a gift of free money.

Forgivable Loans (At 0% Interest)

Forgivable mortgage loans are second mortgages that you won't have to pay back as long as you stay in a home for a set number of years.

These loans come with an interest rate of 0%. Lenders will forgive them, meaning that owners won't have to pay them back, after a certain number of years. Often, lenders will forgive the loan after 5 years, but they do have the option of not forgiving these loans for a longer period, even up to 15 or 20 years.

You will, though, have to repay these loans if you move before the forgiveness period ends. For instance, if your lender says it will forgive your loan after 5 years and you move, refinance your loan or sell your home in 4 years, you'll have to pay back all or a portion of your forgivable loan.

This second mortgage will usually be large enough to cover your entire down payment.

Deferred-Payment Loans (At 0% Interest)

You might also qualify for a second mortgage with a deferred payment. You don't have to repay these second loans, again for an amount large enough to cover your down payment, until you move, sell, refinance your first mortgage or pay down your first loan.

These loans, though, are never forgiven, so you will have to repay them if you ever leave your home. You'll usually do this through the proceeds from selling your residence.

Low-Interest Loans

Your lender or another organization might offer you the opportunity to take out a second mortgage loan at the same time your first mortgage is finalized. You can use the funds from this loan to cover your down payment. You will have to repay this loan each month, usually when you make your payments on your first loan. This means you’ll be making two mortgage payments each month.

The goal is to nab a low interest rate on these loans. Some lenders or organizations might offer these second loans with no interest at all.

Matched Savings Programs

Matched savings programs, otherwise known as individual development accounts, are another way for homeowners to help pay for their down payments. In such programs, home buyers deposit money into an account with a bank, government agency or community organization. That institution agrees to match however much the buyers deposit. Buyers can then use the total amount of funds to help cover their down payments.

For instance, buyers might deposit $5,000 into an account. The bank, government agency or community organization with which they are working will then add $5,000 more into the account. The buyers can use this $10,000 to cover the cost of their down payment.

8 Down Payment Assistance Options

Here are eight down payment assistance programs that you might be able to use as a first-time home buyer.

1. Chenoa Fund

One nationwide (except in New York) source of down payment assistance is the Chenoa Fund. The Chenoa Fund is an affordable housing program administered by CBC Mortgage Agency (CBCMA), a federally chartered government entity.

The Chenoa Fund provides up to 3.5% down payment assistance, or DPA. Conveniently enough, that’s the down payment you need for an FHA loan. If you have a FICO® Score of 620 or higher and a DTI of 45% or less, you’ll get a second mortgage with no interest and no payments. If your income is less than 115% of your area’s median income, and you make your mortgage payment on time for 36 months, the mortgage is forgiven. If you make more than 115% of your area’s median income, the DPA must be repaid.

If you make a late mortgage payment, you’ll be given a second chance at loan forgiveness. You get to reset the period, and the mortgage will still be forgiven if you make timely payments for the next 36 months.

2. Community Seconds

Community Seconds is a Fannie Mae-approved (more on Fannie Mae below) second mortgage that allows home buyers to use the funds available from state and local governments as well as housing nonprofits to put together a down payment, get help with closing costs and even complete minor renovations. Contact your local HUD office to learn more about the down payment and closing cost assistance available where you live.

3. HUD Home Programs

When it comes to housing matters, the U.S. Department of Housing and Urban Development, or HUD, reigns supreme.

HUD directly assists Americans who need housing help. It encourages responsible homeownership through its programs. HUD sells foreclosed homes and sponsors programs, discussed below, that make it easier for a variety of low- and moderate-income people to buy homes.

HUD houses the Federal Housing Administration, or FHA. The FHA funds mortgages made by private lenders according to its rules. In addition to HUD and the FHA, the Veteran’s Administration, or VA, and the US Department of Agriculture, or USDA, offer loan programs that provide guarantees through private lenders.

This option is not a form of down payment assistance per se, but a way to buy a discounted home, with only 3.5% down (if you qualify for an FHA mortgage; more on that below).

If you’re looking for a bargain, consider buying a HUD house. HUD houses are homes that were last purchased with an FHA loan. Because of foreclosure, the government now owns these properties, and HUD manages them until they are sold. HUD houses are purchased “as-is.” That means that the government makes no warranties and will not undertake repairs.

Potential buyers are strongly encouraged to perform a thorough home inspection so that they know exactly what they are getting into. If you buy a HUD home with an FHA mortgage (below), you may be able to finance renovations with an FHA 203k loan and roll both loans into one convenient monthly payment.

HUD also administers special home buying programs that in some cases require no down payment, and in others offers homes at deep discounts, through such programs as The Good Neighbor Next Door, Section 8 Housing Choice Voucher Program and Section 184 Indian Home Loan Guarantee Program. You can learn more about eligibility requirements for each of these programs directly from HUD.

4. Government-Sponsored Entities

Fannie Mae and Freddie Mac are government-sponsored entities that work to purchase loans after origination to keep lenders liquid, and to encourage low- and middle-income families to become homeowners.

Lenders must meet Freddie and Fannie’s requirements to be able to sell them their mortgages so that they have the liquidity to issue future mortgages. Fannie Mae’s participation in the Community Seconds program helps lenders originate primary mortgages with confidence, because Fannie Mae is promising not to avoid purchasing their loans due to the subordinate mortgage.

Fannie Mae funds the HomeReady mortgage, while Freddie Mac funds the Home Possible mortgage program. Their backing makes it possible to get a mortgage loan with as little as 3% down payment.

5. HomePath Homes

If you are a first-time home buyer, you might want to consider a HomePath home. These are Fannie Mae-owned homes offered to the public at a discount after the previous owner defaulted on a Fannie Mae-owned mortgage.

There are lots of great reasons to consider a HomePath Home for your first home purchase, including low down payments and the HomeStyle renovation loan eligibility. But none is more enticing than the closing cost assistance – up to 3% of the home’s purchase price – which is available if you take the online HomeReady home ownership course and ultimately buy a HomePath home. This means that if you purchase a HomePath home for $200,000, you will get a credit for up to $6,000 in closing costs.

6. FHA Loans

Loans insured by government agencies – such as VA or FHA loans – aren’t technically examples of down payment assistance programs. However, these government-backed loans usually allow buyers to provide lower down payments, even with slightly shaky credit. This can be of help to first-time buyers worried about coming up with thousands of dollars at closing.

FHA loans are insured by the Federal Housing Administration, a division of HUD. With an FHA loan, you can buy a home with as little as 3.5% down if your credit score is 580 or higher. If you have a 10% down payment available, you may be approved with a credit score as low as 500.

7. USDA Loans

USDA loans are loans for people who are looking to buy homes in rural or suburban areas. To qualify, your home must be in a zone that the USDA deems “adequately rural.” You also cannot earn more than 115% of your county’s median income, and your property must not be a working farm. With a USDA loan, you can buy a home with no down payment.

8. VA Loans

VA loans are home loans for current members of the Armed Forces, veterans and certain spouses of deceased service members. You must meet service requirements before you can get a VA loan. Like a USDA loan, a VA loan allows you to buy a home with no money down.

Final Thoughts On Down Payment Assistance

Don’t let worries of coming up with down payment dollars scare you away from buying a home. Today’s buyers have more options than ever for putting together these funds.

It’s possible to qualify for a mortgage from conventional lenders with a down payment as low as 3% of a home’s final purchase price. And if you need help coming up with an even smaller down payment, the down payment assistance programs offered by community organizations, government agencies and local lenders could help you clear this financial hurdle.

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Miranda Crace

The Rocket Mortgage Learning Center is dedicated to bringing you articles on home buying, loan types, mortgage basics and refinancing. We also offer calculators to determine home affordability, home equity, monthly mortgage payments and the benefit of refinancing. No matter where you are in the home buying and financing process, Rocket Mortgage has the articles and resources you can rely on.