4 Types of down payment assistance explained (Podcast)

Need help with your down payment? Look no further

Down payments can seem very intimidating, especially for first-time buyers.

If saving thousands — or tens of thousands — sounds like a pipe dream, a down payment assistance program may be able to help. These can cover part or all of your down payment requirements. And in some cases, you never need to repay the funds.

Loan advisor Ivan Simental explained how DPA works on a recent episode of The Mortgage Reports Podcast. If you’re interesed in getting help with your down payment, here’s what you should know.

Listen to Ivan on The Mortgage Reports Podcast!

What is down payment assistance?

Down payment assistance programs (DPA) provide funds specifically for first-time homebuyers. Typically, these can be used only on the down payment part of the purchase. Though with some programs, you may be able to use the funds toward closing costs as well.

“Down payment assistance programs are amazing,” said mortgage advisor Ivan Simental on The Mortgage Reports Podcast.

“If that is the only way that you can obtain financing, It’s a great opportunity for you to get into a house that you love and start your homeownership journey.”

So how much can you get from these programs?

In many cases, DPA programs give you a set percentage (say, 2% to 5% of your purchase price). For instance, if the program offers 3% assistance and the sale price is $300,000, you could receive $9,000 toward your new home purchase.

Other DPA programs may match your contribution or give you a flat dollar amount to put toward your down payment.

4 types of down payment assistance programs

Down payment programs vary by state, so the exact help you might be eligible for depends on where you live. All in all, there are over 2,000 DPA programs across the country.

There are four types of down payment assistance that might be available, depending on which programs operate in your area. These include grants, second mortgages, deferred second mortgages, and forgivable second mortgages.

Let’s take a look at all four in more depth.

1. Home buyer grants

Down payment assistance grants are typically funds given by the state or a state-run agency. They can also come from nonprofits.

Grants are reserved for lower-income homebuyers, and they never need to be repaid under any circumstance. According to Simental, these are the most common type of DPA programs out there.

2. Second mortgages

Down payment assistance can come as a loan, too — also called a second mortgage.

With these types of programs, the state or agency lends you the money, and you pay it back monthly just as you do with your main mortgage. (An important note here: This is a second payment in addition to the payment on your first mortgage.)

3. Deferred second mortgages

With some down payment assistance loans, you don’t have to make payments right away. Instead, you’ll defer the DPA payments and repay your loan only when you sell the house or refinance your mortgage. In this case, the funds would come from your sale proceeds.

4. Forgivable second mortgages

The last type of down payment assistance is a forgivable loan. As long as you stay in the home a certain amount of time — usually five to 10 years — the loan is forgiven and won’t need to be repaid.

If you do move or refinance your loan before that point, however, you’d typically need to repay the funds, or at least a prorated portion of them.

Eligibility for down payment assistance

The exact requirements for down payment assistance will depend on what program you decide to use (and what’s available in your area). Generally speaking, though, you’ll need to fit the below profile:

You’re a first-time homebuyer

The majority of grant programs are designed for first-time homebuyers only. In some cases, though, you might be able to qualify if you haven’t owned a home in a while.

“If you sell your property and it’s been longer than three years, you are technically considered a first-time homebuyer,” Simental said.

You have a low to moderate income

Down payment assistance programs are for consumers who would otherwise struggle to buy a home. Because of this, most have strict income requirements you’ll need to fall under in order to qualify.

Typically, household income limits are based on the area median income (AMI). So if you have average or low income for the area in which you live, there’s a good chance you could be eligible.

You’re buying a primary residence

You can only use down payment assistance on primary residences — meaning a home you intend to live in full-time. These programs cannot be used for second homes, vacation houses, or investment properties.

The home might have to be a single-family residence, too, but not always.

You’re using a participating lender approved by the DPA agency

Not all mortgage lenders work with all down payment programs. As Simental put it, “The mortgage lender that you’re working with has to be approved through the agency that the downpayment assistance program is going through.”

Your best bet is to ask your loan officer what down payment assistance programs they work with or, if there’s a specific DPA you plan to use, ask the agency what lenders it recommends.

You’re willing to take a home buyer education course

Most home buyer assistance programs require the borrower to complete a homeowner education course in order to qualify.

Luckily, these classes can often be taken online. And first-time home buyers usually learn valuable information that will not only help them buy a home, but also manage their monthly payments and ongoing homeowership costs down the line.

You can qualify both for the DPA program and your mortgage loan

Finally, you have to be able to meet the eligibility requirements of both your DPA program and your mortgage program.

Certain DPAs only work with one type of loan — for instance, an FHA mortgage — but many can be used with any major loan program, including:

• Conforming loans backed by Fannie Mae or Freddie Mac
• FHA loans backed by the Federal Housing Administration
• VA loans backed by the Department of Veterans Affairs
• USDA loans backed by the U.S. Department of Agriculture

Note, VA and USDA loans do not require a down payment. But putting some money down can help lower your interest rate and monthly mortgage payments.

Depending on which home loan you choose, there might be minimum credit score requirements, limits on your debt-to-income ratio, and in some cases, you may be limited to buying a house in certain areas.

Ask your loan officer for more details on the requirements you’ll need to meet before moving forward.

How to find down payment grants or loans

There are over 2,000 first-time home buyer programs operating across the country, with multiple DPAs in every state. So how do borrowers find help in their area?

Start by asking your loan officer. They may have worked with borrowers using down payment grants in the past, and should know which programs the mortgage company partners with.

In addition, you can:

• Ask your real estate agent or Realtor for recommendations
• Turn to your state’s housing finance authority or agency (HFA)
• Look on the Department of Housing and Urban Development (HUD) website, which lists programs by state, city, and county

Finally, you can do a simple Google search for “down payment assistance programs in [state/city/county].” This should yield some programs you can look into as a starting point.

Need down payment help?

If you’re considering using down payment assistance to buy a house, reach out to a mortgage professional in your area. They can point you toward programs in your area and advise you on applying and qualifying.

Finally, “ask a lot of questions,” Simental said. “There is no dumb or silly question. The more questions you ask, the more informed you will be.”

Many home buyers are in line for down payment help and don’t even know it. So don’t let this opportunity go to waste. Look into local programs and see if you can get a grant or loan to cover your upfront home buying costs.