What is Down Payment Assistance?
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If you’re having trouble coming up with the minimum down payment for a house or condo, you may find your answer in down payment assistance programs. These programs exist all across the country and often go unused. Depending on your search, you can find them at either the national, state, county, or city level. You just have to find one and apply— and after that, hopefully be chosen!
But just what are down payment assistance programs? Let’s talk about it.
Table of Contents:
What is down payment assistance?
Down payment assistance programs (sometimes referred to as DPAs) administer funds which can in turn be put towards the required down payment or closing costs when purchasing a new home. Essentially ‘free money’, down payment assistance programs are meant as a way to get people out of renting and into owning.
Types of DPAs
Down payment assistance comes in two forms: loans or grants.
Loans
Down payment assistance loans themselves come in a variety of formats. The loan terms can be as long as 45 years with low simple interest and deferred payments. Or, no payment may be required until the home’s title is transferred, the home is sold, the home is no longer the borrower’s primary residence, or the home is foreclosed on.
Other down payment assistance loans don’t require any payments until the home is sold, and instead only want a percentage of the home’s appreciation when it is sold.
As you can see, there’s not really a norm with down payment assistance loans. Each one is a little unique.
Grants
Down payment assistance grants are always pretty straightforward— they do not have to be paid back as long as the borrower meets certain conditions. The ‘condition’ is usually only that the borrower must use it as his or her primary residence for a set period of time (normally five to ten years). If this condition is met, the money is free.
While down payment assistance grants are normally the most sought after programs (and therefore more competitive than loans), they still often fly underneath the ‘public awareness’ radar. Just like the prettiest girl often doesn’t get asked to prom, so too do many down payment assistance programs go unused. For this reason alone, always apply to a program if you meet the basic eligibility requirements. Never assume!
How can I get down payment assistance?
Find a program and apply. It’s that simple. The paperwork needed to apply is usually on par with, or less than, what’s needed to apply with a lender for your primary mortgage. So expect to need bank statements, pay stubs, proof of address and proof of identification. Tax statements from the past two years will also be needed.
Finding a down payment assistance program isn’t that hard. If you want to do it yourself, it’s not rocket science, but we do have a few tips.
Tip #1: Don’t just search for down payment assistance.
Add ‘first time home buyer program’ into your search, too. If you don’t, you’re likely going to miss out on some programs (especially if you live in a highly populated area). Yes, your search will be incredibly long, but it’s going to get you results.
Tip #2: Start off with your specific region. Zoom out as needed.
When searching, your search should look something like this:
Search 1: Midlothian, VA, down payment assistance first time home buyer program
Search 2: Chesterfield County, VA, down payment assistance first time home buyer program
Search 3: Virginia down payment assistance first time home buyer program
The more specific the program is to your geographic area, the more the results will be tailored to your needs. Each program reflects the average home price and average income for the area it serves.
Just so we’re clear, obviously down payment assistance funds must be used in the city, county or state in which it’s issued. You can’t take a program tailored for a specific county and use it elsewhere, even if it is in a neighboring county only a five minute drive away (unless it’s specifically mentioned in the program’s brief).
Tip #3: Stick to government run websites.
There are some legit programs out there that aren’t run by government housing authorities; however, there aren’t many. When searching, concentrate your effort on websites that have .gov extensions. You’ll save yourself valuable time.
NEVER give any of your personal information to gain access to information about a down payment assistance program, UNLESS it’s to a government employee with a government email.
If no information is listed on the site, and the site insists that you must enter in your personal contact information, exit out. It’s wasting your time and you could possibly endanger your digital identity by submitting your personal info.
Tip #4: Pick up the phone.
For some reason or another, some down payment assistance programs aren’t actively listed on the internet. Maybe they lost funding, got it back, but forgot to update their website listing.
Whatever the reason, there are programs out there that aren’t searchable. Before you give up hope and go to a state or national level down payment assistance program, pick up your phone and call your local housing authority. They will be able to point you towards a program more suited to your needs if there is one nearby.
How does a down payment assistance program work?
It really depends on the down payment assistance program. Each is unique and different, but here are some things to take into consideration:
Time Factor
You will definitely want to allocate time for your application to be processed. We recommend 45 to 60 days at minimum (because anything involving the government takes time). When you apply, definitely speak with the program manager about what to expect.
For this reason, down payment assistance programs can’t be used as a last minute resort to buy a house that you recently fell in love with. They have to be a part of the game plan from the beginning for them to be effective. In fact, apply to them before you ever meet with a real estate agent or apply for pre-approval with a lender.
You Must Work With a Participating Lender
Many programs out there require you to work with a participating lender. Banks, on the whole, don’t like the idea of down payment assistance. This is because lenders usually like to see some sort of buyer commitment before lending any money.
Make no mistake, banks are fully capable of financing all of your house, but they choose not to and for good reason. If you don’t have any skin in the game, you’re far more likely to walk away from making payments the first time things go south for you. (There are of course other reasons down payments are needed, but this is a major one.)
Consequently, many lenders don’t accept down payments that come from down payment assistance programs. They want to see that you as a buyer are committed and that you know how to manage money. Regardless of your story and financial acumen, down payment assistance may suggest to lenders that you’re not financially mature enough to take on a mortgage.
To use a down payment assistance program, you will likely need to work with an approved lender who is OK with your down payment funds coming from a down payment assistance program. Your chosen program will likely list out approved lenders. If it doesn’t, call or email them for a list.
You Must Meet Required Average Median Income Requirements
On average, down payment assistance programs are geared towards people on the lower end of the income spectrum (80% AMI or lower), but that’s not universally true. We’ve seen programs with AMI requirements of 180% or below, so don’t assume you make too much money to qualify!
It can’t be stressed enough. There are a lot of programs out there, and they all have different requirements.
You Must Not Have Owned a Home in the Past Three Years
Most programs say something like, “Must be a first time home buyer or not have owned a home in the past three years.” So if you’ve owned a home, but it’s been three years since you did, you can still apply.
They don’t want you selling your home and then turning around and using down payment assistance to buy another one. These programs are for people who actually need the money to buy a home in their geographic area so they can increase their standard of living. They’re not stepping stones for investors.
You Must Attend a Homeownership/ Home Buying Course
It’s normal for programs to require you to take a homeownership or home buying educational course. They’re never that long, and can be done either online, during the evenings, or on the weekends.
Can I get down payment assistance with an FHA loan?
Yes, but it depends on the lender. Your lender must agree to accept funds from a down payment assistance program. Call the point of contact for your DPA program and ask for a list of approved lenders if it’s not listed on any informational material.
If you’re already pre-qualified with a lender, ask your loan officer if he or she is willing to work with your DPA.
Can I get down payment assistance with a conventional loan?
Yes, but like FHA loans, it all depends on the program and the bank. They must agree to work with one another.
Using funds from a down payment assistance program must be part of your strategy from the very beginning. If you know you’re going to need funding assistance, don’t bother getting pre-approved with a bank first.
Some DPA programs don’t require you to work with an approved lender, and some banks don’t care where your down payment assistance comes from, but the two always have to be compatible. For this reason, start with down payment assistance programs before going to a lender.
Do you have to pay back down payment assistance?
If it’s a loan, yes. If it’s a grant, no.
Loans very often have deferred payment options (with low simple interest), and may even be forgiven if certain conditions are met.
Grants are free as long as you meet certain requirements. Usually they only require you to live in the home for five or ten years.
Once again, it depends on the down payment assistance program.
What does your credit score have to be to get down payment assistance?
There really isn’t a norm, and if you look you’ll find that most down payment assistance programs (90% and above) don’t have minimum credit score requirements. This is because it’s kind of a moot point: Even if you get down payment assistance, you still have to get pre-approved with a lender, which will have its own credit score requirements.
Most people who use DPA funds will use those funds in conjunction with an FHA loan. The minimum credit score for an FHA loan is currently 580. It’s possible to have a score lower than a 580 and still use an FHA loan, but you’ll have to put down 10% of the home’s purchase price instead of the 3.5% required of 580+ borrowers. Your DPA program may not distribute funds in that high of an amount.
What are the best down payment assistance programs?
Usually the best down payment assistance programs are at local levels, which is why you should always start your search there. National DPA programs usually come in the form of loans and may have high interest rates, so start off county and state specific.
Aim for grants because grants are essentially free money. There are some awesome loan DPA programs out there, too, where no money is required until the home’s title is transferred (meaning if and when it’s sold, gifted, or foreclosed on).
There’s no list we could write out because it all depends on where you live and what’s available to you. We can say that most national DPA programs aren’t even worth a Google.
What is the HOPE program?
Standing for Homeownership and Opportunity for People Everywhere, the HOPE program is responsible for many down payment assistance programs across the country. It’s quite possible that the DPA program you’ll end up applying to will be funded by the federal government.
Should I use down payment assistance?
Are you currently renting? Is there any foreseeable way for you not to rent? Do you plan on living in your city or county for an extended amount of time?
If you are unable to buy because you lack the funds necessary for a down payment, then you should apply for down payment assistance. When you buy a house, the money you spend on your mortgage is still essentially yours. Instead of being in your bank account, it’s now equity in your house— minus interest, taxes and insurance, of course. Those things aside, that’s a hell of a lot of money compared to what you lose when you pay your rent. Rent money is lost forever and never comes back to you.
Homeownership is important for financial independence. The more money-leeches you can remove from your life, the sooner you’ll be better off. As we all know, there are a lot leeches in this world. Don’t just assume you have to live with all of them.
If you haven’t bought a house yet because you lack the funds to do so, don’t even think twice about it. Do it.