Mortgage Dove

The Ultimate Guide to Down Payment Assistance Programs and Grants

Are you worried that you won't be able to afford a down payment on your home? There's good news! If you are a first-time home buyer, you may be qualified for down payment assistance through a government agency or private organization. Let's take a look at what down payment assistance is and how it works. There are also several down payment assistance programs that you should consider when purchasing a house.

What Is Down Payment Assistance?

Programs that provide down payment assistance (DPA) offer grants and loans that can be used to help home buyers pay their closing costs and down payments. These programs are available in more than 2000 locations nationwide. These programs are mostly run by the state, county, or city governments. DPA programs vary depending on where you live, but most home buyers may be qualified for thousands of dollars in down payment assistance if they meet the requirements.

Who Is Eligible for Down Payment Assistance?

Down payment assistance programs are usually intended for first-time home buyers. However, a repeat home buyer is often considered a "first-time buyer" if they haven’t owned a home in the past three years.

To be eligible for down payment assistance, here are some requirements:

  • First-time home buyer
  • Low to moderate income
  • Purchase of a primary residence
  • Purchase within local purchase price limits
  • Use an approved mortgage program
  • Work with an approved mortgage lender

Remember that every down payment assistance program is different. You will need to be able to meet the criteria depending on where you live and what programs are available. You may also be eligible for more money or easier qualification if you live in a "target area." A lender can help you determine if your property qualifies.

How Down Payment Assistance Work

Down payment assistance (DPA) helps homebuyers save money for a down payment by receiving grants or low-interest loans. If you are eligible, you may be granted a forgivable loan or a cash gift that will never have to be repaid. You may have to repay some loans, but they are usually with low or no interest. You can also use many DPAs to cover closing costs.

Most DPA programs are offered at the local level, and eligibility requirements can vary from one program to the next.

DPAs often require you to be a first-time home buyer. It means you haven’t owned a home within three years, must have a good credit score, and a low or moderate income. These rules may not be the same for all programs. You should also be aware that DPA programs often have a list or "participating lenders" list. You may need to choose a lender that is approved by your assistance program.

Different Types of Down Payment Assistance

Most assistance comes in the form of first-time home buyer grants and loans provided at the local and state levels. A home buyer may also qualify for funds from the nonprofits and private sector based on where they live.

  • Grants

Grants are the most valuable form of down payment assistance. That's because they provide money that homeowners don't have to repay. It's considered a gift.

However, some programs, even though they are called grants by the organization doing the funding, may create a second lien  on your home. As long as you understand what you are getting into, there is nothing wrong with it. But make sure you read all terms and conditions associated with any down payment assistance agreement. It is also crucial to inform your lender about the grant. Otherwise, you could end up with a "silent" second mortgage.

  • Forgivable Loans (At 0% Interest)

Forgivable mortgage loans  are second mortgages you don't have to pay back as long as you remain in a home for a certain number of years.

The interest rate on these loans is 0%. Participating lenders will forgive them, so the owners won't be required to repay them after some years. Lenders will typically forgive loans after five years. However, they can choose to not forgive these loans for long periods, such as up to 15 years or 20 years.

However, if you move before the forgiveness period ended, you will have to repay these loans. If your loan officer claims it will forgive your loan in 5 years, and you move or refinance your loan within 4 years, you'll be responsible for repaying all or part of the forgivable loan. The second mortgage will usually be sufficient to cover your entire down payment.

  • Deferred-Payment Loans (At 0% interest)

A deferred payment  may be available if you qualify for a second mortgage. These second loans don't require you to repay them for an amount large enough to cover your down payment until you move, sell, refinance your first mortgage or pay down your first loan.

Although these loans can never be forgiven, so you will have to repay them if you ever leave your home. Usually, it is done through the proceeds of selling your residence.

  • Low-Interest Loans

You might get offered the chance to get a second mortgage loan from your lender or another organization once your first mortgage is finalized. You could use the funds from this loan to cover your down payment. The loan funds can be used to pay your down payment. You'll have to repay this loan each month, usually when you pay for your first loan. That means you will have to make two mortgage payments per month.

These loans should have a low-interest rate. These second loans may get offered by some lenders or organizations with no interest at all.

  • Matched Savings Programs

Homeowners can also use matched savings programs (also known as individual development accounts) to help them pay their down payments. Home buyers can deposit money into an account at a bank, community organization, or government agency in such programs. The institution will agree to match any amount the buyers' deposit. Then the total funds can be used by buyers to cover their down payments.

Buyers may deposit $5,000 in an account, for example. The account will get added with $5,000 by the bank, government agency, or community group whom the buyers work with. This $10,000 can get used by buyers to pay their down payment.

How Long Will it Take to Get Down Payment Assistance?

It’s  all dependent on the program you're applying for and the type of assistance you will receive. Each state has its own program, as do different cities and other organizations. Programs can be implemented at different rates, based on the demand and the size of the programs.

Be aware that the closing process for your home could take longer if you ask for assistance with your down payment. The assistance program needs to cooperate with your lender in order to secure your loan and the down payment funds. Based on the speed at which the program operates, it may delay the closing process.

What are the Requirements to Qualify?

The two most commonly required conditions you must meet are a minimum credit score of 620 or higher and an income that is in line with the program's criteria. A lot of programs will also look at your debt-to-income ratio.

Other common requirements vary depending on the program. Some of these requirements are:

  • The home has to be located in a particular area or county.
  • Be a first-time home buyer.
  • You should attend a course on home buying and finances.
  • You have to live in your home for a specific amount of time (often between 3 - 10-years).

How Can I Apply?

Begin by looking into the programs available in your region, if any. HUD offers a list of local home buying programs according to state. Contact your city or county to find out whether they offer any loans or grant programs. Check their websites for details on how you can apply. Contact them by email or by phone to get the specific information you won't find on the internet. Check to see if your mortgage lender works with the program.

How Big of a Down Payment Grant Can I Receive?

Down payment assistance programs are something like a ZIP code lottery. Based on the location you wish to buy, you may be qualified for a few thousand dollars or even tens of thousands. Your program will determine whether the money is a grant or a loan that must be paid back.

As an example:

  • In Seattle, there is a chance to receive up to $55,000 in an interest-free loan that you aren't required to pay until you sell, move, transfer, or refinance your home. That could be many years later.
  • Within New York City, you might qualify for a forgivable loan or up to $100,000 which, if you stay in the residence for 10-15 years (depending on the loan amount), does not require to be paid back.
  • In Iowa, there is a chance to receive grants of up to $2,500 towards your down payment and closing costs.

Of course, there are homeowners who are eligible for more, and others less. The only method to find out the amount of help you're qualified for is to locate local down payment assistance programs within your area and apply for them.

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