Down Payment Assistance Programs And Grants: What They Are And How They Work

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.

Let’s look at what down payment assistance is and how it works, plus some different down payment assistance programs to consider when buying a house.

Down payment assistance helps you cover your down payment as a first-time home buyer. When you buy a home, you’ll usually have to put money down that’s equal to a percentage of your home’s final purchase price. This is called your down payment. The amount you’ll need will vary, and some mortgage programs may not require a down payment at all. Coming up with this upfront cash is often a difficult hurdle, which is why down payment assistance loans, programs and grants were created to help first-time buyers.

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, local government and nonprofit programs consider you a first-time home buyer, even if you owned a home before that 3-year period.

You can’t own any form of rental or investment property either, even if you don’t live in the property.

Down payment assistance comes in the form of grants, loans and other programs. It’s typically reserved only for borrowers who qualify as first-time home buyers. Down payment assistance programs can be run by a variety of organizations, including the U.S. Department of Housing and Urban Development (HUD), your local or state housing authority or a nonprofit.

Eligibility is determined by your household income and credit history and varies by state and program. An application is typically needed, and sometimes you’re also required to attend training or home buyer education on the mortgage process and maintaining finances.

How much you’re awarded differs depending on the program. Some programs offer a percentage based on the home’s sale price, while others cap assistance at a certain dollar amount. When looking at programs to apply for, research their requirements, whether it’s a grant or loan and how much assistance you can receive.

In addition, you should look to make sure that the down payment assistance you're applying for will be acceptable to your lender.

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

Grants

The most valuable form of down payment assistance is the grant. That’s because grants provide money that homeowners never have to repay – it’s considered a gift.

An important word of warning here is that some programs that are labeled grants by the organization doing the funding may actually create a second lien on your home. While nothing is inherently wrong with this as long as you know what you’re getting into, make sure to carefully read the terms associated with any agreement for down payment assistance.

You’ll also want to make sure your lender is aware of the grant – otherwise, you might end up with a “silent” second mortgage.

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%. Participating 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 making the forgiveness period longer out, even up to 15 or 20 years.

You’ll 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 mortgage 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. These second mortgages are typically for a loan amount large enough to cover your down payment – and you don’t have to repay these second loans until you move, sell, refinance your first mortgage or pay down your first loan.

These loans are never forgiven, so you’ll have to repay them if you ever leave your home. You’ll usually cover the repayment of the loan 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’ll have to repay this loan in installments, usually when you make your monthly payments on your first loan. This means you’ll be making two mortgage payments each month.

The goal is to get 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 get help paying 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.

Let’s talk about some common questions that come up around down payment assistance.

How long does it take to get down payment assistance?

How long it takes to get down payment assistance depends on the program and the type of assistance. Each state offers its own programs, as do different cities and organizations. These programs move at different speeds depending on the demand and size of the program.

It’s important to know that, if you apply for down payment assistance, it may take longer to close on your home. The assistance program must work with your lender to secure the loan and the down payment funds. This can add time to the closing process, depending on how quickly the down payment assistance program acts.

What do I need to qualify for down payment assistance?

The two most common requirements you need to meet are a minimum credit score of 620 or higher and an income limit that meets the program’s requirements. Many programs also consider your debt-to-income ratio (DTI).

Other common requirements vary by program. Some of these requirements include:

• The home must be in a specific locale or county.
• You must be a first-time home buyer.
• You must attend a class on home buying and finances.
• You must live in the home for a certain number of years (often 3 – 10 years).

How can I apply for down payment assistance?

Start by researching what programs are available in your area, if any. HUD has a list of local home buying programs by state. Check with your city and county to see if they offer any grants or loan programs. Search their websites for information on how to apply. Reach out to them via email or phone for specific answers you can’t find online. Make sure your mortgage lender works with the program.

Can I get additional down payment assistance with an FHA loan?

While the Federal Housing Administration (FHA) does not offer its own down payment assistance, you may still be able to get help with your down payment through a program. Take note: Closing cost assistance on FHA loans is capped at 6%. For an FHA loan, you have to put up some of your own money, but most down payment programs will work with FHA loans.

Before considering how much money you need for a down payment and whether you’ll need assistance with paying for it, start the process of getting preapproved for your mortgage. That way, you know how much house you can afford before saving for a down payment and closing on a property.

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.

Are you ready to get started with the home buying process? Get approved for your mortgage today with help from our team.

¹ Client will be required to pay a 1% down payment, with the ability to pay a maximum of 2.99%, and Rocket Mortgage will cover an additional 2% of the client’s purchase price as a down payment. This offer is only available on conventional purchase loans. Primary residence only. Cost of mortgage insurance premium not passed through to client. Offer valid only for home buyers when qualifying income is less than or equal to 80% area median income based on county where property is located. Must lock rate on or after 5/22/2023. Not available with any other discounts or promotions. Offer cannot be retroactively applied to previously closed loans or loans that have a locked rate. This is not a commitment to lend. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional restrictions/conditions may apply.