Understanding Down Payment Assistance: A Simple Guide for Homebuyers
How today’s down payment assistance programs can help open the door to homeownership.
Over the years, I’ve heard countless people say the same thing: “I’d buy a home if I could just save for the down payment.” It’s not an excuse, it’s a real challenge. Between rising costs and everyday bills, most families find it difficult to save enough to get started. That’s why down payment assistance programs are so important.
Down Payment Assistance programs (DPAs) have been a topic near and dear to my heart throughout my 30+ years as an underwriter. At the beginning of my lending career, I helped create some local programs. Although I left the creation part of the business, I spent the rest of my career underwriting for many different DPAs.
What Are Down Payment Assistance Programs?
There are numerous and varied DPAs across the country. These programs exist at the federal, state, county, and city levels, as well as at the non-profit level. They are all designed to help consumers purchase a primary residence. It is common for DPA requirements to state that it must be for a first-time homebuyer (meaning you haven’t owned a home in the past three years), but that is not the case for every organization offering DPAs.
The first thing to know is that you need to find a program and see if you qualify. Some programs have income limits, while others do not. Some require a “silent” second mortgage; others do not. Some focus on particular neighborhoods, and others are aimed at specific groups, such as Tribal programs.
Common Types of Down Payment Assistance
Let’s start by looking at some of the most common types of programs available.
Income-Based – These programs set maximum income limits based on family size and location. For example, the maximum income for a family of four in San Francisco, California, is much higher than in Birmingham, Alabama. This difference reflects the higher cost of living in San Francisco, with housing being the main factor.
Location-Based – These programs are usually sponsored by state or county housing groups that aim to revitalize specific neighborhoods and attract new residents. They may have income rules, but the focus is often on the home’s location, and they may be more flexible with income requirements.
Cultural – These programs are created for specific cultures, including Indigenous peoples and Tribes. For instance, some tribal housing authorities provide down payment assistance grants to help members purchase homes on or near tribal lands.
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How Down Payment Assistance Programs Work
Some DPA programs require a “silent second,” which means the program funds the down payment and sometimes closing costs. Your lender funds the first mortgage, and the DPA records a second mortgage on the home. Typically, this loan does not need to be repaid as long as you maintain the home as your primary residence for a specified period of time. If you sell or refinance too soon, you may have to repay part of the funds. Most of these programs are forgiven over time, and the forgiveness schedule is based on the program’s rules.
For example, a program might offer $15,000 toward the down payment and closing costs. The organization places a “silent” second mortgage on the home. Each year, 25 percent of this second mortgage is forgiven. After four years as your primary residence, the full amount is forgiven. However, if you sell after two years, the organization recoups 50 percent of the funds to use for another homebuyer.
Another type of DPA is a grant. Grants provide funds based on the organization’s requirements, with no second mortgage and no repayment required.
Other programs offer funds with a second mortgage and a small repayment plan. These plans are usually very flexible and require only a few years of small payments before forgiving the remaining balance. They are designed to keep homeowners in their homes for a specific period of time.
Finally, there are Shared Appreciation Programs. This is a complex type of down payment assistance program. Because of this, I will write an entirely different article next week and update this article to link to it.
Finding the Right Program for You
As I stated in the beginning, there are many types of programs across the country. So, where do you start? I always suggest starting with the DPA organization. Not every lender is approved to work with every DPA organization. In fact, it is very common for both lenders and their underwriters to be trained and certified to work with different DPA programs. So start there.
Find an organization that offers DPAs that fit your situation, whether based on culture, neighborhood, or income. Review their requirements and identify which lenders are approved. Then get pre-qualified with that lender, making sure they understand which DPA you plan to use.
To help, I am building a list of DPA Resources for consumers and industry professionals. I do not intend to reinvent the wheel, as there are already many resource sites available. I will gather these resources on a helpful DPA page. Keep in mind that this is a moving target. Programs can run out of money or lose funding during the year, so availability can change.
Final Thoughts on Using Down Payment Assistance
Remember, the down payment is only one part of qualifying for a mortgage. You still need to meet both the regular mortgage requirements and the DPA program requirements. This article is meant to help guide you toward viable options for down payment assistance.
Do your homework, and you may find the perfect DPA to help you get into either your first home or your next primary residence.
Note: Next week, I will be covering Shared Appreciation Loans, a complex type of Down Payment Assistance loan that is a proven popular option.
