Down payment assistance (DPA) programs provide loans or grants to house purchasers to help them save money for a down payment.
If the borrower meets certain criteria, they are eligible for a grant or a low- or no-interest loan to cover the cost of the down payment.
Some assistance programs also provide money that can be put towards paying closing fees.
The majority of DPA initiatives are available at the local level, which means the qualifying standards for each program differ.
Many DPA programs need the borrower to be a first-time home buyer with a good credit score and a modest or moderate income.
Some DPAs include a list of participating lenders with whom they collaborate. As a result, applicants may need to choose a lender who has been authorized by the assistance program chosen.
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Who Qualifies for Down Payment Assistance?
First-time home purchasers are often eligible for down payment assistance programs. They are offered through state and government programs and many home builders have downpayment assistance programs too.
If a repeat home buyer hasn’t purchased a house in the last three years, they are more often than not qualified as a first-time buyer.
Income limits, purchase price limits, and purchasing a property in a suitable location are all possible restrictions.
Many programs also require that homebuyers take homeownership education classes.
Every down payment assistance program differs somewhat. The specific requirements for eligibility may vary depending on where the borrower resides and the programs that are offered. However, many of them follow the same general rules.
6 Most Common DPA Qualifications
- Only first-time home purchasers are eligible
- Buyers must earn under a specified amount based on Area Median Income (AMI)
- The residence has to be used as a main dwelling
- The property falls within the local purchase price cap
- The DPA is utilized in conjunction with a mortgage loan that has been approved
- Borrowers must work with a reputable mortgage lender
What Are the 4 Most Common Types of Down Payment Assistance?
All four varieties of DPA are widely used. The most prevalent are grants, although only by a little margin.
Keep in mind that some DPA loans are interest-free, while others offer lower rates than the borrower’s first mortgage and demand the same or higher rate.
#1 Down Payment Grant
A grant is money given to a person, company, government, or other entity for a specified purpose that does not need repayment.
Because the grant recipient provides a public benefit, grants do not demand repayment. Homeownership is a public benefit for first-time house purchasers.
Homeownership is critical to the economy because homeowners:
- Stabilize all types of neighborhoods
- Increase the wealth of all communities
- Family wealth is built through generations
According to a government study, $10,000 grants to first-time house purchasers can boost homeownership by 34 percent. Congress recently sponsored seven legislative initiatives related to grants and tax credits, including the LIFT Act for first-time home buyers.
#2 Down Payment Loan
Down payment loans are second mortgages that have monthly payments in addition to the lendee’s first mortgage.
The larger the down payment, the less money the buyer needs to borrow to complete the purchase, the lower their monthly payments, and the less interest they will pay over time.
Lenders may request down payments as little as zero percent or as high as 50 percent depending on the borrower and the kind of transaction. However, in the United States, 20 percent down payment is the standard for the majority of conventional loans.
#3 Deferred Down Payment Loan
A deferred down payment loan is a second mortgage with deferred payments that are only due when the owner sells, refinances, or relocates.
These types of loans are never forgiven, so applicants have to pay them back if they move out. This is normally done using the proceeds from the sale of the property.
#3 Forgivable Down Payment Loan
A deferred down payment loan also involves a second mortgage that is forgiven over a certain period of time, often five years; however, some loan terms are up to 15 or 20 years.
These loan types are only paid back if the borrower decides to move, sell, or refinance before the length of time the agreement specifies.
Where Can Borrowers Apply for Down Payment Assistance?
The majority of down payment assistance programs are offered on a local or state level. Although there are some national DPAs and several statewide programs, the bulk of DPAs are managed at the local or county level.
Speak with a loan officer or mortgage broker to learn about local down payment assistance programs. They should be aware of any local grants or loan programs that are available. They’ll also be aware of the programs that the lender accepts, as not all lenders work with all DPAs.
Another great resource is the FHA’s website, which lists first-time homebuyer programs by state to help borrowers find assistance in their area.
Don’t forget to ask new home builders you are working with. Many offer downpayment and closing cost assistance and in most cases they may be added to other assistance programs.
