Down Payment Assistance Programs

How do down payment assistance programs work?

Each down payment assistance program has its own rules and processes, but generally, here's the breakdown of how they work:

• You, the borrower or grantee, apply for assistance and provide documentation that shows your income and other necessary information
• Someone reviews your application to determine whether you qualify
• Someone determines whether the house you want to buy qualifies
• The organization notifies you of its decision
• If you qualify, the organization applies the funds to your down payment

If you're interested in applying for a down payment assistance program, do as much research as possible first. Different programs have different requirements. Some, such as grants, never require repayment; others are types of loans you can use as cash for your down payment, but that you eventually have to repay. Others hinge on “mortgage credit certificates,” which reduce the amount of federal income tax you're required to pay so you have money available up-front for a down payment or closing costs.

Where do down payment assistance programs come from?

State and local housing finance agencies administer many down payment assistance programs. The grants for them often come from the U.S. Department of Housing and Urban Development, or HUD, as well as employers, community organizations, and state and local governments.

If the federal, state or local government runs the program, it usually comes from tax dollars set aside to help buyers. However, because many buyers don't think they're eligible, the money often goes unused. Other programs, such as those run by lenders, are loans that rely on the bank's capital; still, others get money through donations to nonprofit organizations. Depending on the program, buyers can often get between a few thousand and several thousand dollars in help.

What types of programs are available for down payment assistance?

Depending on your qualifications and what you're looking for, you can find programs for help - not just with down payment money, but with mortgage payments and other financial aspects of home ownership. Some of the most popular include:

First-time buyer

FHA and USDA loans for first-time buyers can offer low down payments, reduced interest and other benefits, and so can many state and local programs. You can ask your real estate agent or visit a local HUD-approved housing counseling agency to find even more programs for first-time buyers.

Repeat buyer

For most programs, first-time buyer refers to anyone who hasn't owned a home in three years. You could technically be a first-time buyer again, even if you've owned a home in the past! However, there are initiatives for people moving from one house to the next, including VA loans, some HUD programs, and state and local assistance programs.

Mortgage credit

A mortgage credit certificate, or MCC, is an IRS tax credit that reduces your federal tax burden. In the end, it leaves you with more money in your pocket to subsidize your monthly mortgage payments. You can use an MCC with a down payment assistance program, which can help secure your ability to repay the loan and lower your tax bill each year you live in the home.

Energy efficient

The Federal Housing Administration uses its Energy Efficient Mortgage program, or EEM, to let homeowners finance energy-efficient improvements like new insulation or a modern HVAC system with an FHA-insured mortgage. The VA also uses the EEM program for its loans. The amount of the cost of improvements doesn't come directly out of your pocket; instead, it's rolled into your primary loan.

Purchase program

Purchasing a home in a rural area or a revitalization area is the key to taking advantage of benefits from the Department of Housing and Urban Development. Some programs allow you to save money on a home's purchase price, such as the Good Neighbor Next Door program, or to save money on interest through subsidies or low down payments with no private mortgage insurance requirements.

Home improvement

Many programs, like the Energy Efficient Mortgage program and HUD 203(k) loans, allow you more flexibility in buying a fixer-upper. Some roll the costs of repairs into your monthly mortgage payment, while others consider the after-repaired value, or ARV, of the home when they're determining how much you qualify to borrow.

Veterans program

The Department of Veterans Affairs backs loans for qualifying veterans, service members and some dependents of each. If you qualify, you don't need a down payment; your lender will finance the entire purchase price. You won't have to pay for private mortgage insurance, either. The seller can also pay all of your closing costs so you can move into a home without having spent a dime.

Disabled homeowner

Several types of assistance are available to disabled homeowners, including HUD's Homeownership Voucher Program, the Social Security Administration's SSI, and Fannie Mae's Community HomeChoice program. Check with state housing agencies, as well as federal and nonprofit programs for disabled veterans and Habitat for Humanity.

Down-payment assistance

Typically, grants and loans are the best ways to get actual down payment assistance. Many states and cities offer programs that allow you to take advantage of “free money” or to borrow the cash necessary for a down payment.

Job-specific

Your employer may offer a down payment assistance program, or you may be eligible for a VA loan, the Good Neighbor Next Door program (which helps law enforcement, teachers, firefighters and emergency medical technicians buy homes in revitalization areas), or the Teacher Next Door program.

Which down payment assistance programs are available nationwide?

Many government programs are available to home buyers anywhere in the U.S. Some are loan programs that allow you to buy a home with little or no down payment, while others provide discounted housing to people in certain career fields.

Good Neighbor Next Door

The Good Neighbor Next Door program is available to law enforcement professionals, firefighters and emergency medical technicians, and teachers. This program offers a 50 percent discount on homes in “revitalization areas”.

USDA Loans

Backed by the U.S. Department of Agriculture, USDA loans allow people to purchase homes in some rural areas with as little as nothing down. People whose credit scores are 640 and above are eligible for streamlined processing, while those with credit scores lower than that may need to provide extra documentation.

FHA Loans

Loans backed by the Federal Housing Administration are available nationwide. Buyers with credit scores of 580 or higher may be eligible for a down payment of 3.5 percent of the home's purchase price. People whose credit scores are below 580 may still qualify but will have to come up with at least a 10 percent down payment.

VA Loans

Military service members in good standing and honorably discharged veterans of the U.S. Armed Forces, as well as some qualifying dependents, are eligible for zero-down loans backed by the U.S. Department of Veterans Affairs. These loans do not require the purchase of private mortgage insurance.

FHA Section 203(k)

FHA Section 203(k) loans require a 3 percent down payment and are available to people who want to live in a home while making improvements to it. The cost of improvements is included in the loan.

Fannie Mae and Freddie Mac

With down payment requirements of 3 percent of a home's sales price, Fannie Mae and Freddie Mac loans generally allow buyers access to competitive interest rates.

How does down payment assistance vary by state?

Federal programs are available to everyone who qualifies, so no matter where you live, you're free to apply for down payment assistance. However, states vary - some offer many more programs than others do.

To find out what government programs are available to you, check your state's Department of Housing's website. If you don't find what you're looking for there, find a number to call - usually, there's a “Contact Us” page with important numbers. Let the person you speak with know that you're a resident of the state and that you're looking for down payment assistance programs that may be a good fit for your needs.

Remember that down payment assistance is often available through county, city or township programs, as well as through private organizations and nonprofits. If your state doesn't have specific programs that you qualify for, check for local programs instead.

Where can I find down payment assistance programs for me?

Check with HUD to find out which federal programs may be right for you, or go directly to Fannie Mae and Freddie Mac.

Your lender will be able to help you find down payment assistance programs that fit your needs, whether they're grants through a nonprofit or they're government programs designed to help buyers. Your real estate agent can help, too.

Finally, check your state's Department of Housing website or go through HUD.gov's local homebuying programs page.

Do I qualify for down payment assistance?

Every down payment assistance program has its own rules. Although many are designed for first-time buyers (and people who have not owned a home in three or more years is considered a first-time buyer), there are several that people can use to make their second, third or subsequent home purchase.

Some factors that affect down payment assistance include:

• Income - Many, but not all, down payment assistance programs, are income-based. In some places, you must make less than 80 percent of the area's median income; in others, you can make up to 140 percent of the area's median income and still qualify. Check each program's income requirements before you apply to save yourself time.
• Career Based - Some down payment assistance programs are limited to people in certain careers, or to people who have worked in certain careers, like VA loans, which are for military personnel and their immediate families, or the Teacher Next Door program, which is only available to teachers and school administrators.
• Home Location and Structure: Other programs depend on the home and a variety of other factors; some are only available to people buying in certain areas or homes that need to be repaired or upgraded to be more energy efficient.
  
  

There's no guarantee that you will qualify for down payment assistance; the only way to find out is to examine each program's guidelines and restrictions, and then apply.

How do I get down payment assistance?

Once you find a down payment assistance program that you most likely qualify for, you'll have to gather supporting documentation and fill out an application. Sometimes, you'll have to sit through an interview or participate in homebuyer education classes, as well.

Every organization offering down payment assistance has its own procedures, but generally, they'll need to see:

• W2s from the past few years to verify your employment and income history
• Bank statements
• Pay stubs
• 1099s, if you have them
• Tax returns
• Information on the property you intend to buy, which your real estate agent can most likely provide
  
  

The organization will review your application to make sure you - and the house, if necessary - qualify for a down payment assistance program. In some cases, in order to receive a grant or loan, you'll have to participate in a class or a series of classes on home ownership or responsible borrowing.

The whole process is a little bit similar to the way a lender evaluates your mortgage application, but usually not quite as complex.

How does FHA down payment assistance work?

FHA down payment assistance is not cash you'll get toward your down payment. Instead, it's a lower down payment requirement - and if it's your first home (or your first home in three years), you could be eligible to put down as little as 3.5 percent of the home's purchase price.

The way it works is simple: You apply for an FHA loan just like you'd apply for any other mortgage. You don't apply through the Federal Housing Administration; you apply through a private lender, who then asks the FHA to insure the loan. When the FHA insures a loan, that means that if you default on your payments, the FHA repays the lender for you. That's why lenders are willing to make loans in cases that they'd otherwise disapprove.

You can still make more than a 3.5 percent down payment if you happen to have more money saved, but with this type of loan, 3.5 percent is the bottom line. The more money you put down, the more money you'll save on payments and interest over time.

What is a down payment assistance loan?

The term down payment assistance loan refers to a loan that doesn't require you to put down 20 percent of the home's sales price. Several loans fit the bill, including FHA loans, VA loans and more. These loans allow you to buy a home without waiting to save 20 percent of your own money by financing more than 80 percent of the property.

Here are two examples:

• If you borrow using an FHA loan and have a down payment of 3.5 percent, your lender is letting you borrow 96.5 percent of the home's value - that's what's left after you kick in your 3.5 percent. If the home you were buying cost $100,000, you would put down $3,500 and your lender would finance $96,500. You'd repay all of that, plus interest, over the term of the loan.
• If you borrow using a VA loan and don't put any money down toward the sales price of the home, your lender is letting you borrow 100 percent of the home's value. If the home you were buying cost $100,000, you wouldn't have to come up with any cash (other than closing costs or other fees that the seller wasn't paying). You'd repay the whole amount, plus interest, over the term of the loan.

The higher your down payment, the less you have to pay in the long run. If you put down $10,000 on that $100,000 home, your lender is only financing $90,000 of the purchase. That's all you'll have to pay back over the life of your loan.