How to Buy a Home With Down Payment Assistance

When an expected down payment amount is 20% of the total cost of your house, it can seem daunting and like you’ll never be able to save enough money up. Buying a $200,000 house at only 3% down would take you two years if you were only able to save around $200 per month, which is what most people say they are able to save. That’s a lot of years of saving up before you can even get close to 20%! But have no fear – most first time home buyers can apply for down payment assistance programs through their state and local municipalities. Grants and forgivable loans are typically available. You can receive help with getting your mortgage. It’s easier than you think.

How do these programs work? The help comes to you through state housing finance agencies as well as city and county government programs that are aimed at meeting affordable housing needs. The types of closing costs and down payment assistances can vary depending on which program you’re using. There are more than 2,000 down payment assistance programs in the United States alone that are nationwide – and that’s not even accounting for the thousands that work at local, city, or county levels. It has been calculated that those who use down payment assistance programs have saved, on average, $17,776 more over the lifetime of their mortgage than those who didn’t – and nine out of ten properties in the country qualify for assistance as long as the home buyer is eligible to receive it.

You’re more likely to qualify for down payment assistance (and then to get more money) if you buy in a so-called target area.  The legal word for this is a “qualified census tract”, or QCT. These tracts are designated by the US Department of Housing and Urban Development, based on household income data of the areas in question. Your state or local authority can also designate certain areas. The areas chosen are usually places that have experienced chronic and unusual economic issues, or need help financially regenerating themselves.

Typical types of assistance include:

Low Interest Loans: These loans must be repaid over a designated period of time, usually about ten years from the day the loan is paid out to you. The purpose of this type of loan is to spread the down payment and closing costs over multiple years instead of you having to pay it all at once up front.

Zero Interest / Deferred Payment Loans: Generally, no payments on the down payment or closing cost loans are due until  the home is sold, the mortgage term ends, or the mortgage is refinanced.

Zero Interest / Forgivable Loans: These loans are forgiven over an agreed upon period, such as five years. The money doesn’t have to be repaid under the condition that the borrower still owns and lives in the home after the period is over.

Grants: Grants are the outright gift of monetary assistance. They are not required to be repaid under any circumstance.

Who can get down payment assistance? Most down payment assistance programs are only for first time buyers, but don’t count yourself out just because you’ve owned a home before. The legal speak in the fine print of the program’s terms typically state that they consider a homebuyer to be a person who has not owned a home for the past three years. You also will likely qualify if you are a teacher, police officer, emergency responder, or government employee. Some programs, but far fewer, are open to qualified repeat buyers, too, so it’s worth asking about if you need the help.

Besides being a first time home buyer, a person can qualify for a down payment assistance program by taking a home buyer education course online, meeting income limits (most programs are geared towards low or moderate income folks, so a potential borrower’s income must be below a certain threshold), purchase in an approved location, stay below the maximum home purchase price (typically a percentage of an area’s median home purchase price), or contribute some of your own money towards the purchase.

How do you apply for mortgage down payment assistance? You can start by talking with your mortgage lender. They will be able to direct you to assistance programs offered by your area’s housing finance agencies. They will also be able to quickly run over each program with you, explain which you have the chance to apply for, and explain how they work. You can then check with your city and county to get the ball rolling on the programs you wish to apply for. Do this by visiting the website of the local government agency or organization administering the program to learn more about their requirements – for example, they may only work with certain mortgage lenders. Then, you’ll apply for the mortgage with a lender who is approved to work with the grant program. The local agencies can direct you to a mortgage lender that they work with, if you need them to.

Some common examples of homebuyer down payment assistance programs are…

HUD’s Good Neighbor Next Door: This program is run by the US Department of Housing and Urban Development, and it’s not strictly limited to those who are first time buyers. To be eligible, you must be purchasing a property that is in a designated area, and you must be of a certain profession – either a law enforcement officer, a firefighter, an emergency medical technician, or a teacher. If you commit to living at the home for at least 36 months, you can receive up to half off of the list price of the home, which sounds wonderful – but the designated areas can often be in places that others are reluctant to live in, so weigh your options before you go with this program.

National Home Buyer’s Fund: This one is pretty straight forward – after you find a participating lender, this program provides up to 5% of your loan amount. It’s a non-repayable grant, which means you don’t have to pay it back. Check with your mortgage lender to get more information on how you can qualify for this grant – it differs by state.

Veteran’s Administration Loans: If you are a United States veteran or active duty, you should qualify for a Veteran’s Administration loan. With this type of loan, you don’t have to make a down payment at all. You can typically get a competitive mortgage rate with this type of loan. They are backed by the government and offered through participating lenders, so as long as you meet the service requirements, you can qualify for one of these loans.

Veteran’s Administration Adapted Housing Grants: If you are a disabled United States veteran, you likely qualify for this. This type of grant helps you purchase a home that is adapted to your service-related disability. This type of grant applies if you need to make changes to a home in order to make it accessible for your disability.

USDA Loans: If you like the idea of living out in the country, look into a USDA Loan. You can get a home loan using the Department of Agriculture program, which is meant to help those with lower and moderate incomes buy homes in more rural areas. You don’t need a down payment, but you do need to meet certain income requirements. If you don’t like the idea of living in the country, this type of loan is not for you, as it requires you to live somewhere rural.

First Home Club from Quontic Bank: This club offers the chance for potential home buyers to receive matching funds towards a down payment in the state of New York. When you team up with the First Home Club, you make monthly deposits into a Quontic savings account. For each dollar you save, you get four dollars in matching funds up to $7,500 to go toward your new home. You must have your mortgage funded through Quontic if you want to take advantage of this program.

Local First-Time Homebuyer Grants: Most of these grants are extremely specific in what type of situation they will serve. These grants are income dependent and location specific. There are very few of these programs at a national level and they are typically distributed by state. Some of the programs require you to repay them if you only live in the house for a short period of time. They are, however, usually forgivable, typically forgiving 20% of the grant each year for five years. Some programs can also levy a tax recapture if you sell your home for a profit before a certain number of years have passed. This means that some gains you will get for your home’s increased value when you sell might get taxed in order to make up for the break you got earlier.