Saving up for a down payment is one of the greatest challenges faced by prospective home buyers. But thanks to down payment assistance programs, home buying without a down payment saved up is possible.
Down payment assistance options exist for many different types of home buyers – including first-time home buyers and buyers who are using FHA loans to purchase a home. These programs are designed to make homeownership more accessible by reducing the financial barriers that can prevent people from purchasing a home. If you need down payment assistance, this guide contains everything you need to know.
Types of Down Payment Assistance
Down payment assistance can come in many different forms. Each type of assistance has different requirements and benefits. Understanding these options can help you decide which type of assistance is best for you. Here are some of the most common types of down payment assistance.
Grants
Grants are essentially free money. If an institution gives you a grant, you generally do not have to pay the money back. State governments, local governments, non-profit organizations, and banks offer grants to home buyers to help cover the cost of a down payment.
To be eligible for a grant, your income will generally need to fall below a certain amount. You will also likely need to meet location requirements. Since down payment assistance grants are intended to help people obtain affordable housing, you will likely be required to use your new home exclusively as your primary residence – not an investment property or vacation home.
It’s important to note that the availability and amount of grants can vary widely based on your location and the specific programs offered by the granting institutions.
Forgivable Loans
Forgivable loans are another form of down payment assistance. If you receive a forgivable loan to help cover the cost of purchasing a home, you generally will not be required to pay the loan back as long as you meet certain requirements. Requirements may include making your mortgage payments on time and living in the house for a certain number of years.
Forgivable loans can come with very low – or non-existent – interest rates, making them an affordable option. These loans can be particularly beneficial if you plan to stay in your home for the duration of the loan forgiveness period, as they essentially become a grant after you meet the specified conditions.
Low-Interest Loans
Home buyers without savings may consider taking out a low-interest loan to cover the cost of a down payment. Unlike grants and deferred-payment loans, borrowers generally have to begin repaying low-interest loans immediately.
This means if you take out a low-interest loan for your down payment and a mortgage to cover the rest of the purchase price, you will be paying back two loans at once. If you decide to take out a low-interest loan for your down payment, it is important to work with your lender or broker to find the lowest possible interest rate. This way, you’ll minimize your monthly payment amounts.
Deferred-Payment Loans
With a deferred payment loan, you will receive a sum of money to help cover your down payment. You will generally not be required to repay the loan unless you sell or refinance the house.
Other types of deferred-payment loans might require you to start repaying the loan after a certain number of years have passed. Similar to forgivable loans, deferred-payment loans can come with low or non-existent interest rates. This type of loan can provide significant flexibility, especially if you anticipate changes in your financial situation that might make immediate repayment difficult.
Eligibility Requirements for Assistance
Your eligibility for down payment assistance will depend on factors such as your income, location, and whether or not you already own a home. Contact your state and local governments, as well as non-profit organizations and banks, to learn more about the eligibility requirements for their down payment assistance programs.
Each program may have unique qualifications, so it's essential to research thoroughly and apply to multiple programs to increase your chances of receiving assistance.
National Down Payment Assistance Programs
National and local banks offer down payment assistance programs across the country. Therefore, a great place to start your search for down payment assistance may be at your bank. Certain banks will offer you a grant for down payment assistance if you take out a mortgage with them. It is important to speak with the bank about income and location requirements to make sure you qualify.
In addition to banks, federal programs such as those offered by the U.S. Department of Housing and Urban Development (HUD) provide valuable resources and assistance for prospective home buyers.
State Down Payment Assistance
Contact your local Housing and Urban Development (HUD) office to learn more about down payment assistance in your local area. States generally have grants, forgivable loans, and deferred-payment loans available to home buyers in their jurisdiction. You will need to apply for these benefits through your state government.
Some local governments also offer grants, forgivable loans, and deferred-payment loans to home buyers. It’s also beneficial to check with state housing finance agencies, as they often administer these programs and can provide detailed information on how to apply.
First-Time Homebuyer Down Payment Assistance
Many state and local governments have down payment assistance programs that are specifically intended for first-time home buyers. Contact your state and local housing authorities to learn more about eligibility, funding availability, and the application process.
First-time homebuyer programs are often designed to make the transition to homeownership smoother and more affordable, and they can be a critical resource for individuals and families entering the housing market for the first time.
Down Payment Assistance for FHA Loans
FHA loans require low down payments compared to conventional loans. However, it can still be challenging for home buyers to save up for an FHA loan down payment. State governments, local governments, banks, and non-profit institutions offer down payment assistance to FHA borrowers.
The key to affordable homeownership for many families is the combination of a down payment assistance program with an FHA loan. This combination can lower the barrier to entry and make homeownership more attainable for those with limited savings.
Pros and Cons of Down Payment Assistance
Down payment assistance programs come with both pros and cons. Home buyers should therefore carefully review the requirements and implications of any down payment assistance program they are considering. While these programs can provide crucial support, they may also come with strings attached that need to be fully understood before committing.
Pros of Down Payment Assistance
One of the advantages of down payment assistance is that you can purchase a home sooner than you otherwise would. For example, a 3.5% down payment on a $350,000 house is $12,250.
With that down payment on top of closing costs and other expenses associated with purchasing a home, it could take you years to feel ready to take the plunge. Down payment assistance can significantly reduce this waiting period, allowing you to move into your new home much sooner.
Another advantage of down payment assistance is that you can lower your monthly expenses. By providing a larger down payment, you can potentially avoid Private Mortgage Insurance (PMI) and obtain a more favorable interest rate. Avoiding PMI can save you hundreds of dollars each month, and a lower interest rate can reduce your overall loan costs by thousands of dollars over the life of the mortgage.
In addition, down payment assistance programs enable you to keep more cash in your bank account. This way, you will have more money to maintain your emergency fund and cover household expenses. Having a robust emergency fund is crucial for handling unexpected expenses, such as home repairs or medical bills, without falling into debt.
Cons of Down Payment Assistance
One of the main disadvantages of down payment assistance is that the program requirements may limit your ability to move whenever you want. To avoid having to repay a grant, forgivable loan, or deferred-payment loan, you will likely have to live in your house for a certain number of years. This requirement can be restrictive, especially if your personal or professional circumstances change and you need to relocate.
Another con is that you might inadvertently take on more monthly expenses than you can handle. Though mortgage lenders and down payment assistance providers will evaluate your ability to pay for your housing as part of the application process, the availability of down payment assistance may leave you feeling tempted to purchase a house that stretches your monthly budget.
Overextending financially can lead to stress and difficulty managing other aspects of your life, such as savings and retirement planning. It’s important to be aware of your financial situation and choose a home that fits within your current budget.
Buy A Home With Down Payment Assistance
Buyers who are interested in down payment assistance will generally need to meet income requirements, live in specific areas, and agree to use the property as their primary residence for a certain number of years. It’s essential to review the conditions of any assistance program to ensure it aligns with your long-term goals.
Check with your state and local housing authorities to learn more about application requirements in your area. To learn more about other types of housing assistance, check out the HUD Housing Network's list of resources.
