What Is Down Payment Assistance?

When you buy a home, you’ll usually have to put money down that’s equal to a percentage of your home’s final purchase price. This is called your down payment. The amount you’ll need will vary and some mortgage programs require no down payment at all. While there are variations, coming up with this cash is often a difficult hurdle for buyers.

As the name suggests, down payment assistance helps you cover your down payment as a first-time homebuyer.

Who Qualifies As A First-Time Home Buyer?

Most government and charity programs have strict definitions for who qualifies as a first-time homebuyer. If you haven’t had any kind of homeownership in the last 3 years, most state, federal and nonprofit programs consider you a first-time buyer, even if you’d owned a home before that 3-year period.

You can’t own any form of rental or investment property and get first-time home buyer down payment assistance, even if you don’t live in the property.

How Does Down Payment Assistance Work?

Down payment assistance comes in the form of grants, loans, and other programs. It’s typically reserved for first-time homebuyers only. They can be run by a variety of organizations, such as your local or state housing authority, or by a nonprofit.

Eligibility is determined by your household income and credit history, varying by state and program. An application is typically needed, and sometimes you’re also required to attend training or homebuyer education on the mortgage process and maintaining finances.

How much you’re awarded differs depending on the program. Some programs offer a percentage based on the home’s sale price, while others cap assistance at a certain dollar amount. When looking for programs to apply for, research their requirements, whether it’s a grant or loan and how much assistance you can receive.

Types Of Down Payment Assistance.

Most assistance comes in the form of first-time homebuyer grants and loans offered at the state and local levels. There may even be funds available from the private sector and nonprofits where you live.

Grants

The most valuable form of down payment assistance is the grant. That’s because grants provide money that homeowners never have to repay – it’s considered a gift.

Forgivable Loans (At 0% Interest)

Forgivable mortgage loans are second mortgages that you won’t have to pay back as long as you stay in a home for a set number of years.

These loans come with an interest rate of 0%. Participating lenders will forgive them, meaning that owners won’t have to pay them back, after a certain number of years. Often, lenders will forgive the loan after 5 years, but they do have the option of not forgiving these loans for a longer period, even up to 15 or 20 years.

However, you’ll have to repay these loans if you move before the forgiveness period ends. For instance, if your loan officer says it will forgive your loan after 5 years and you move, refinance your loan or sell your home in 4 years, you’ll have to pay back all or a portion of your forgivable loan. This second mortgage will usually be large enough to cover your entire down payment.

Deferred-Payment Loans (At 0% Interest)

You might also qualify for a second mortgage with a deferred payment. You don’t have to repay these second loans, again for an amount large enough to cover your down payment, until you move, sell, refinance your first mortgage or pay down your first loan.

However, these loans are never forgiven, so you’ll have to repay them if you ever leave your home. You’ll usually do this through the proceeds from selling your residence.

Low-Interest Loans

Your lender or another organization might offer you the opportunity to take out a second mortgage loan at the same time your first mortgage is finalized. You can use the funds from this loan to cover your down payment. You’ll have to repay this loan each month, usually when you make your payments on your first loan. This means you’ll be making two mortgage payments each month. The goal is to nab a low-interest rate on these loans. Some lenders or organizations might offer these second loans with no interest at all.

Matched Savings Programs

Matched savings programs, otherwise known as individual development accounts, are another way for homeowners to help pay for their down payments. In such programs, home buyers deposit money into an account with a bank, government agency, or community organization. That institution agrees to match however much the buyer's deposit. Buyers can then use the total amount of funds to help cover their down payments.

For instance, buyers might deposit $5,000 into an account. The bank, government agency, or community organization with which they are working will then add $5,000 more into the account. The buyers can use this $10,000 to cover the cost of their down payment.