What Is Down Payment Assistance And How Can It Help You?

There’s ample reason to own a home these days, including the fact that it can be cheaper than renting in the long run, and that you could be building equity for future use. However, down payments often present a considerable hurdle to prospective buyers, especially first-time home buyers. Thankfully, a variety of low down payment options can help you minimize costs here if you should find yourself in need. Likewise, there are a number of down payment assistance programs that can help you achieve the dream of homeownership.

Let’s take a closer look at how down payment assistance works, and what requirements and qualifications it comes with, as well as how to get down payment assistance and whether or not it’s right for you.

What Is Down Payment Assistance?

When you buy a home, it’s common to put a percentage of the total purchase price down as a down payment. While the actual amount will vary by individual loan, lender, and home buying program, saving up enough funds in advance to put the necessary cash down here is often a challenge for many buyers. Down payment assistance can help you cover the difference.

In effect, down payment assistance consists of programs designed to help property buyers – and first-time home buyers in particular – become homeowners. These programs, which generally take the form of loans, grants, employer assistance, and special savings accounts, can help mitigate initial expenses associated with purchasing a home. Note that your options may vary on a state-by-state basis here as well.

How Does Down Payment Assistance Work?

There are several different types of down payment assistance. Just a few of many options include:

• Grants
• Zero-interest, forgivable loans
• Zero-interest, payment-deferred loans
• Low-interest loans
• Special savings accounts

Grants: Grants are often a preferred down payment assistance program option for prospective homeowners, as you usually don’t have to repay them. To obtain one, you’ll have to apply to and qualify for the program, which can come from non-profits to state agencies and local housing authorities of all shapes and sizes. Depending on where you live, you may find different grant options available to you.

Loans: Several types of loans can also be obtained that can help you with down payment assistance. As a general rule, these loans are typically paid in tandem with your mortgage, paid off at the time you sell your property, or paid when your home is refinanced or no longer occupied. Alternately, other loan types may be forgivable so long as you live in and occupy the property for a certain predefined time period. Be advised, however, that not all lenders will allow homebuyers to fund their down payment with a loan.

• Second mortgage or home equity line of credit (HELOC): Under a second mortgage or HELOC, you’ll make payments at the same time both on your primary mortgage and a second, smaller loan that covers the cost of your down payment. When purchasing a property, these funding options are typically used alongside a primary mortgage and smaller down payment to provide access to additional sums that can help you avoid paying private mortgage insurance (PMI) on a conventional loan, or fund home repairs and improvements. Rocket Mortgage® does not currently offer second mortgages or HELOCs.
• Loans paid on sale: Another type of second mortgage loan option allows you to avoid having to make monthly payments until you move, sell, or refinance your property. Some options come with lower interest rates attached than primary mortgages, but as with any loan, it’s important to review and research individual loan terms. On the bright side, if you obtain a loan through a government program, it may be interest-free instead.
• Forgivable second mortgage: Under the terms of these loans, a portion of or your entire loan balance is forgiven after you’ve occupied and lived in a home for a preset number of years. This period can differ by lender, but often ranges from as little as 5 years on up to a 15- or 20-year term. Should you move, sell your property, refinance, or finish paying your mortgage off prior to this period’s expiration, you’ll be required to pay off the remaining loan portion that would otherwise be forgiven. Typically, you will not be required to make a monthly payment so long as you live in the home. This form of financing is not common but may come up in your research as an option.
• Employer assistance: In select cases, your employer may also furnish you with funds in the form of grants or second mortgages that can go towards offsetting the purchase price of your home. Payments may or may not be forgivable, and loans might or might not come with deferred payment options. For instance, it’s common for a loan to be forgiven after you’ve spent a certain number of years working at the company. Employer assistance is typically fully accepted by lenders, and can make it simpler to get approved for a mortgage, as financial providers view it as a standard and widely-practiced form of benefit.
• Special savings accounts: Savings accounts with special properties may also be available in select states as well. In essence, these accounts allow individuals who are saving up to buy a home to deposit money that is tax deductible. Certain special savings accounts may even match home buyers’ savings up to certain levels, allowing you save up for a down payment much faster.

Down Payment Assistance Programs

As alluded earlier, several types of down payment assistance programs are available for hopeful home buyers. In addition to grants and loans offered by local governments, state housing authorities, and non-profits of many kinds, one of the first places that many home buyers turn for relief is the Department of Housing and Urban Development (HUD). HUD maintains an expansive catalogue of local home buying programs to browse through. Low-income residents looking to buy a house might also look to the Homeownership and Opportunity for People Everywhere (HOPE) program. Under it, money is provided to resident groups, non-profits, and public organizations to assist with fixing up and rehabbing properties, or for use with down payment assistance.

How To Get Down Payment Assistance As A First-Time Home Buyer

To qualify for many down payment assistance programs, you’ll generally need a minimum credit score of 620 or better and to bring in a household income that’s under maximum program limits. Myriad down payment assistance programs may also require you meet other eligibility criteria as well. For instance, you may need to be below a certain debt-to-income-ratio and be a first-time home buyer, and/or the property may need to be situated in a specific county or location. You may also be required to live in the property for a certain number of years.

You can begin the process by researching what down payment assistance programs are available in your state, local, area or region. Be sure to check with your city, county, and various non-profits to see if grants, loans, or other forms of funding are available as well. You can also reference HUD’s directory of home buying programs to see what opportunities your state offers. You’ll also want to verify that your mortgage lender is able to work with these programs before applying.

As you go through the process, keep in mind that individual programs operate in different manners – and at different speeds as well. As a general rule though, if you qualify for down payment assistance, it helps to know that it may take additional time in order to close on your property. That’s because the down payment assistance program needs to work with your individual lender to secure funding, which may extend the overall closing process.

Down Payment Assistance Requirements

Naturally, buyers must meet certain eligibility requirements in order to be eligible for down payment assistance – some of which may be strict, and many of which may be outside of your control. Some of the most common include having a minimum credit score of 620 and being a first-time home buyer (although the definition of “first-time” can differ by individual assistance program and funding provider, as you’ll soon discover). Below, you’ll find several different criteria that may impact your chances of receiving down payment assistance.

Location: Many types of down payment assistance come with geographic restrictions attached. For instance, cities may often offer assistance to local residents only, while states may often their own alternative variations on programs to other homeowners situated in distant or nearby regions.

Previous homeownership status: A wide variety of programs require you to be a first-time home buyer in order to receive funding, meaning that it can sometimes impact your ability to qualify for down payment assistance if you’ve previously owned property. However – and it’s a big however – the rules aren’t always as black and white as they may seem here. By way of illustration, major mortgage investors like Fannie Mae, Freddie Mac and the FHA define a first-time home buyer as anyone who hasn’t owned residential property in the last 3 years. Noting this, it’s important to understand the rules and do your homework, as you may have more options than you think.

Occupancy requirements: Homeowners must often remain in a house for a certain minimum preset amount of time – otherwise, they may be liable for having to pay back all or part of an otherwise forgivable loan.

Income: As down payment assistance programs are typically crafted to assist low- to moderate-income home buyers, maximum income limits also frequently apply to potential applicants as well.

Keeping these factors in mind, it’s important to research and get to know the rules of any program that you’re considering applying for. Any or all of these factors may impact whether or not a particular down payment assistance option is available to, or a good fit for, you and your household.

The Bottom Line: Down Payment Assistance Can Help First-Time Home Buyers

Down payment assistance can he helpful for future home buyers, in that it provides funds to aid with down payment requirements. Many types of assistance programs are available in the form of loans, grants, employer assistance packages, and more. As a prospective borrower though, it’s important to research and get to know the options available to you, as each comes with their own terms and requirements. In general, though, it’s important to look for homes that fit in your budget.

Wondering if your first home is in your near future? Sign up for the Rocket Money app today to gain a better understanding of your budget and what you can save for your down payment.