When you’re ready to buy your first home, one of the first things the lender’s going to ask is how much money you’re bringing to the table for a down payment. While 20 percent has long been the industry standard, stashing away tens of thousands of dollars isn’t always realistic for every home buyer.
Fortunately, lacking a down payment doesn’t mean that you’re completely shut out of the housing game. Down payment assistance programs remove obstacles to home ownership for buyers who need a little help filling in the gaps financially.
How Down Payment Assistance Programs Work
Generally speaking, down payment assistance programs provide home buyers with the money they need to complete the purchase of a home. These programs are usually administered by state or local government agencies but you’ll find plenty of nonprofit organizations that offer down payment help.
Each program sets its own conditions on how down payment assistance funds are awarded, how they can be used and what strings are attached, if any. For example, certain programs give you the money as a grant if you agree to live in the home for a set amount of time. Others have you put money into a designated down payment account and the program matches your contributions up to a certain amount.
There are also a number of programs that provide help in the form of a loan, which is essentially a silent second mortgage on the home. In most cases, the loan doesn’t carry any interest and your payments are deferred for the first five to ten years after the purchase.
Who’s Eligible for Down Payment Assistance?
Anyone can apply for help through a down payment assistance program but that doesn’t mean everyone will qualify. Each program has its own guidelines as far as eligibility but there are a few basic rules that apply across the board:
- You have to be a first-time buyer – If you’ve got your eye on a vacation home or an investment property, down payment assistance likely isn’t an option. While there are some exceptions, the majority of programs limit funding to what the Department of Housing and Urban Development defines as a “first-time buyer”, i.e. someone who’s never owned a home or hasn’t owned one in the previous three years.
- The home must be approved – If you’re planning to use a down payment assistance program in a specific area, the home you buy has to be covered by the program’s geographic boundaries. Some programs also put restrictions on the type of home you can buy which means you may not be eligible if you’re shopping for a condo, townhome or manufactured home.
- You have to meet the program’s income guidelines – Down payment assistance programs operate on the assumption that you’re not financially able to come up with all the money you need to buy a home. That being said, you have to be below the program’s income threshold to qualify. The cap can be set at a specific dollar amount or a percentage of the median income in your area, depending on the program.
Buyers also have to adhere to the credit standards set out by the lender. That means you’ll still have to prove yourself worthy of a loan through a solid credit score and a strong work history. You may also have to attend home buyer counseling at some point to make sure you understand the financial responsibilities that go along with owning a home.
How Much Money Can You Get?
Down payment assistance programs typically rely on grant or government funding to help buyers. The amount of money you’re able to get really comes down to where you live and which program you use. In some cases, you may even have to chip in something out of your own pocket to seal the deal.
If you live in Washington D.C., for example, you can qualify for up to $50,000 in down payment assistance, which takes the form of an interest-free loan. The loan amortizes over 40 years and your payments are deferred for the first five years. That sounds pretty good, but there’s a catch since buyers are responsible for paying the greater of $500 or 50 percent of liquid assets valued over $3,000 towards the down payment.
New Yorkers, on the other hand, can snag up to $15,000 through the HomeFirst Down Payment Assistance Program when they buy a home, condo or co-op in one of the five boroughs. While that’s a lot less than what D.C. residents qualify for, you wouldn’t be expected to shell out any money of your own. As long as you stay in the home for 10 years, you don’t have to pay back a dime towards the down payment assistance.
How Down Payment Assistance Benefits Home Buyers
As far as the upsides to down payment assistance programs go, there are a quite a few. The most obvious benefit is that they make it possible for you to own a home if you otherwise wouldn’t be able to because you lack the means to put money down.
Getting help with your down payment also means you won’t have to take out as big of a mortgage. The less you borrow, the less interest you’ll be paying over the life of the loan. Not only that but if you qualify for 20 percent or more in down payment funding, you’ll be able to avoid those pricey private mortgage insurance premiums which can drive your monthly payment up.
Qualifying for down payment assistance won’t affect your ability to score other tax breaks for homeowners, such as state tax credits or the federal mortgage interest deduction. That’s a major plus, particularly if you’re banking on these tax breaks to lower your bill once the April filing season rolls around.
Weigh The Cons Carefully
When you look at the potential drawbacks, several things stand out. First, there’s the issue of being able to qualify for down payment assistance. The eligibility guidelines are for the most part pretty narrow and the application process can be just as intensive as trying to get a mortgage loan, which may be frustrating to some buyers.
Next, there’s the issue of the residency requirement. If you’re approved through a program that stipulates you must live in the home for X amount of years, you could be penalized for renting it out to someone else or selling it before the time limit expires. In most cases, you’d be required to pay back the down payment money which could put a serious strain on your finances if you have to come up with a lot of cash all at once.
Finally, there’s the possibility that you could qualify for down payment help but still not be able to get any money. Because they’re often funded by grants, these programs can sometimes run out of money before the end of the fiscal year. If that happens, you’d have to wait until the next batch of funding is released to apply. That can throw a major wrench in your home-buying plans if you’re working on a shorter time frame.
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