The dream of owning a home is a cherished one for many individuals and families across the United States. However, the soaring median existing-home price of around $400,000 can often make it seem like an unattainable goal, especially when faced with the prospect of a substantial down payment. Traditional mortgage loans typically require a 20 percent down payment, equating to a significant sum, but there is good news – down payment assistance (DPA) programs exist to help prospective homeowners bridge the financial gap. In this blog post, we will explore what DPA programs are, how they work, and the steps to access this valuable assistance.
What is a Down Payment Assistance (DPA) Program?
Down payment assistance programs are financial tools designed to provide aspiring homebuyers with the necessary funds to contribute towards the purchase of a home. In addition to assisting with down payments, some programs also extend their support to cover closing costs, which can amount to approximately 2 percent to 5 percent of the loan principal. This additional help can be particularly beneficial for individuals who have allocated their savings primarily for a down payment.
DPA programs are available across the country, with the majority of options offered at the local level through state, county, and city government initiatives. These programs can take the form of loans, grants, or matched savings, each with its unique set of eligibility criteria and repayment terms.
Down Payment Assistance Eligibility Requirements
While eligibility criteria may vary among different DPA programs, the vast majority of assistance is aimed at first-time homebuyers. However, “first-timer” does not exclusively refer to someone purchasing their first home; it can also encompass individuals who have not owned a home in the last three years. Additionally, many programs exclude owners of rental or investment properties, emphasizing that the home should be your primary residence. Some programs may permit the purchase of duplexes or small multi-family properties if you intend to reside in one of the units.
Types of Down Payment Assistance Loans and Programs
Grants: Grants are a type of DPA that offers a one-time cash sum, often as a no-interest second loan. These funds can be used to cover part or all of the down payment or closing costs. The best part is that grants do not need to be repaid and are typically tailored for low- or moderate-income borrowers. Various grant programs are accessible through banks and state and local governments.
Forgivable Loans: Forgivable loans function like loans but can effectively become grants if certain conditions are met. Typically, this type of loan is forgiven after a specific period, provided that you continue to own the home and stay current on your mortgage payments. If you sell your home or move before the specified period, you may be required to repay a portion of the funds. Forgivable loans are often administered through state housing finance agencies.
Low-Interest Loans: Low-interest loans operate as second mortgages with interest rates below market rates. Unlike grants or forgivable loans, these loans must be repaid, usually over a few years. This means that you will have additional monthly payments in addition to your regular mortgage. You can find low-interest loans through various mortgage lenders.
Deferred-Payment Loans: Deferred-payment loans typically do not accrue interest, and you are only responsible for repaying the principal amount borrowed. However, these loans are not forgiven and must be repaid in full when you sell your home or refinance your mortgage. State and local homebuyer assistance programs often offer deferred-payment loans.
Individual Development Accounts (IDAs): IDAs, also known as matched-savings accounts, are special savings accounts where your contributions are matched by either private or public funding sources. These programs typically have income caps and employment requirements, and participants often need to complete financial literacy training. IDAs are usually available at the state level or through private nonprofits and can be used for down payments and closing costs.
Lender-Specific Down Payment Assistance Programs: Some mortgage lenders offer their own DPA programs. For example, Chase offers assistance ranging from $2,500 to $5,000 in many states, which can be used for closing costs and down payment needs. Eligibility for these programs may have specific requirements, such as obtaining a 30-year fixed-rate loan, living in the home as your primary residence, and attending a homebuyer education course.
How to Access Down Payment Assistance
Accessing DPA programs often involves exploring local resources and organizations. Here are some avenues to consider:
State Housing Finance Authority: Many state housing finance authorities (HFAs) offer homebuying assistance and education programs. Check with your state’s HFA for information on available DPA programs.
City and County Government Programs: Numerous counties and cities offer DPA programs as part of their efforts to promote homeownership, especially for first-time buyers. Visit your municipality’s website or consult your loan officer to learn more about local DPA programs in your area.
U.S. Department of Housing and Urban Development (HUD): HUD provides a wealth of information on local homebuying programs by state. Each state also has HUD-approved counselors who can guide you through the homebuying process and help you find financial assistance options.
Owning a home remains a significant milestone for many individuals and families, and down payment assistance programs play a crucial role in turning this dream into a reality. With various types of assistance available, aspiring homeowners can find a program that suits their unique financial situation and eligibility criteria. By exploring local and state resources and leveraging the support provided by DPA programs, more people can achieve the goal of homeownership, even in a challenging real estate market.