One of the critical factors to consider when determining if now is the time to buy a home is your ability to make a down payment.
As an indicator of your financial readiness to follow through on the purchase of a home once you enter into contract, your down payment can significantly affect how competitive your offer is to a seller. This is especially true in a hot market, where sellers often have the ability to choose among multiple offers.
Yet, according to a recent survey by Zillow, saving for a down payment is the most common barrier to home ownership among renters looking to buy.
Fortunately, there are several down payment assistance (DPA) programs available offering financial assistance to those who qualify, including programs for first-time homebuyers, educators, public safety workers, and more.
Learning about down payment assistance programs, the types available, and typical eligibility requirements can help you determine if applying for a DPA is right for you.
What Are Down Payment Assistance (DPA) Programs?
Down payment assistance (DPA) programs are funds that offer financial aid to help specific homebuyers buy a home. These programs help reduce the amount needed to save for a down payment, generally the most significant closing cost for buyers.
Down payment assistance programs are designed to provide options to people who otherwise may not be able to buy a home.
What the programs provide, their requirements, and who is eligible for the funds can vary. For example, some loans are interest-free, others may have lower rates than your first mortgage, and some may require the same or a higher rate. Therefore, it’s important to research your options, so you find the right one for you.
5 Common Types of Down Payment Assistance Programs
Down payment assistance programs are often run by the state, county, or city governments. As a result, the types of assistance available will vary by location.
With more than 2,000 different programs offered nationwide, sorting through available programs can be confusing for some people. However, there are typically five types of DPA, which you can narrow by looking at the options in your city, county, or state. Here are the most common types of down payment assistance programs.
1. Deferred payment zero-interest loans
Deferred payment loans allow you to delay when you need to start repaying the loan. The payback period can be put off for several years.
The advantage is that you can use that money for your down payment without needing to focus on setting aside money immediately to start repaying the loan. However, look for a zero-interest loan. Otherwise, you can quickly build up interest. You do eventually have to pay off this type of loan.
2. Forgivable zero-interest loans
Forgivable zero-interest loans don’t require that you repay the money if you complete the conditions of the loan. These loans typically have a zero interest rate.
A common condition is agreeing to live in the house for a particular number of years. The amount of time you must live in the home before the lender forgives the loan can vary. For instance, you may need to live in the home for as few as five years or as many as 15 or 20.
If you move, refinance, or sell before you meet the loan conditions, you’ll have to pay back a portion or all of the forgivable loan.
3. Low-interest loans
Another option to help secure a down payment is to get a low-interest loan. That said, many lenders won’t allow you to use an unsecured loan, such as a personal loan, for your down payment. An exception is if the loan is through an employer assistance program. Typically, you’ll have to provide some form of collateral, such as a car, for this type of loan.
Alternatively, you may be able to take a loan from your 401(k). This approach does require that you pay back the loan with interest within a set period. You often can borrow up to 50 percent of your account balance or $50,000. Please note, not all 401(k) programs allow this. Additionally, be sure you can pay it back as scheduled. If you don’t, it becomes taxable income.
4. Matched savings programs
You may be able to use a matched savings program to help cover your down payment. These programs require you to deposit money into an account with a government agency, bank, or community organization. The institution will match the amount that you deposit. You can use the total amount of money in the account for your down payment.
Grants are often preferred because they offer free money that you don’t need to pay back. You can find grant opportunities from nonprofits, your local government, and sometimes employers. These are typically tailored to a particular group or area of need.
How Much Assistance Can You Receive?
The amount of assistance you’ll receive depends on the DPA. Some down payment assistance programs provide a percentage based on the house’s sale price. Other programs have a set limit on the dollar amount they will provide.
What Factors Determine Eligibility for Down Payment Assistance?
There are several factors involved when determining your eligibility for a down payment assistance program. Additionally, some requirements are based on the homebuyer, while other factors depend on the home being purchased.
Programs may also be designed to serve specific people, situations, or needs and vary by state. Therefore, you must do your research, so you can find the right program for your needs.
Despite the variability, there are some common factors among programs that indicate whether you’re likely to qualify for a DPA program.
First-time homebuyer status
Many grants and other DPA programs require you to be a first-time homebuyer. However, how that is defined varies. So, even if you’ve owned a home in the past, you may still qualify for some assistance.
For example, many programs consider a person to be a first-time homebuyer if they haven’t owned a home in three years. So, if you’ve been renting for three years or more, you’re a first-time homebuyer again! If you’re buying a house jointly, often only one of you needs to qualify as a first-time homebuyer to be eligible.
even if you’re not a first-time homebuyer, you may still qualify for some downpayment assistance programs
Income and finances
Down payment assistance programs are designed to help people in low-to-moderate income levels. Therefore, your financial situation is one of the main factors taken into consideration when applying for assistance. Many programs have strict income and financial requirements to help determine eligibility.
The income limit can vary across programs, so you’ll need to do your research. Typically, the income requirements are based on the area median income and household size. Therefore, the limits for a single person compared to a family of four will differ.
Programs may also have credit score minimums and cash reserve requirements. For instance, some programs require you to meet a minimum credit score, such as 620 or higher. Others will also take your debt-to-income ratio into account.
Lastly, many programs will allow you to complete a homebuyer education course to ensure a successful homeownership experience. Often, you can complete the course online.
Some DPA programs are set up for people who provide an important community service. These types of professions may include veterans, healthcare workers, educators, law enforcement officials, and firefighters, and more. Typically, the program will help you buy a house in the area where you serve. You can check out HUD’s information on the Good Neighbor Next Door program to help you get started on finding these types of programs in your state.
Home type and usage
DPA programs typically require that the house is occupied as a primary residence. If you’re an investor, you generally won’t qualify for these types of programs.
The type of home you’re buying may also matter. Typically, programs allow you to buy a single-family house, condo, or townhome. Some multifamily properties may qualify if the buyer intends to live there as an owner occupant.
You can find DPA in all communities across the United States. However, the type of programs available vary per geographic region. Additionally, specific approved locations, known as ‘target areas,’ make it easier to qualify for DPA.
To help you focus your search, you’ll want to look for opportunities in the area you’re buying. These resources can help you start your search:
- HUD’s local homebuying programs resource which is broken down by state
- NerdWallet’s list of down payment resources by state
Will a DPA Restrict the Type of Mortgage You Can Have?
Down payment assistance programs typically specify that you borrow from an approved lender and use an approved mortgage program. You may also have to select a certain type of mortgage product.
That said, you generally still have choices about the type of mortgage you can have. Many approved mortgages include commonly used loan programs like FHA loans, VA loans, USDA loans, and even some conventional loans.
What Are the Benefits of DPA?
You can purchase a house with little to no money down. However, it can be hard to compete with buyers who can make larger down payments in a seller’s market. DPA programs can help you submit more competitive offers by providing you with money to put toward a larger down payment.
Additionally, people who can make larger down payments typically save more money over the life of their loan. By putting more money down, you’ll make your opening mortgage balance smaller. As a result, you’ll have lower balances and lower monthly mortgage payments.
How to Access Down Payment Assistance Programs
Many of the groups offering DPA funds are funded by the federal government. Since their fiscal year starts in October, you’re likely to have a more successful application if you apply in the fall. The organizations typically have the most available funds at that time.
Once you’ve found a DPA that’s right for you, you’ll need to apply. Once your approved for the assistance, you’ll be able to take out a home loan from an approved mortgage lender. Be sure to research and compare options before signing up with an approved mortgage lender so you get the best deal for you.
Down Payment Assistance (DPA) Programs Can Help You Get the Home You Want
Being able to make a competitive down payment can help make your offer more attractive to sellers. Yet, saving for a down payment can be difficult. Fortunately, you may qualify for a down payment program that will help provide the money you need for a down payment.
REX can help you with every part of your journey if you’re ready to start the home buying process. Our experts can help you find a home, provide competitive rate comparisons and fast pre-approval from REX Home Loans, and help ensure a smooth close with our in-house title and escrow services. At REX, we’re here to help you find a house you’ll love.