Down payment assistance programs available to you
Of all the expenses that come with locking down a mortgage, making a sizeable down payment on a new property continues to present the biggest challenge. Not only do these upfront payments establish your partial ownership of the home, but the amount you hand over can influence your interest rate throughout the life of the loan.
Most lenders require at least 20% of the sales price to get the mortgage process off on the right foot. That amount can be insurmountable for some, but luckily there are a number of down payment assistance programs that can lend a helping hand.
First-time buyer down payment benefits
Down payments present the largest looming barrier for anyone looking to buy a home. If you’ve never owned real estate before, coming up with that much capital is all the more difficult.
Without any existing equity to draw from, getting a foothold in the real estate market might seem near-impossible. However, as a first-time homebuyer, you’ll have access to a number of incentives and programs to help you meet the expense of a down payment.
Types of down payment assistance programs
Down payment assistance programs are usually most accessible to those buying a home for the first time. Depending on your location and what programs you qualify for, your state or local municipality may offer a number of loans and grants to help you bridge the gap to homeownership.
Private lenders or nearby nonprofits may also offer assistance, so be sure to research your own area to learn everything you can about available options. If you do secure down payment assistance, the funds will likely be structured in one of a few ways:
- Low-interest loans
- Forgivable loans
- Matched savings programs
In the world of lending money, a no-strings-attached handover of funds is exceptionally rare. That’s why the most sought after type of down payment assistance is in the form of grants.
Grants are essentially given as a gift, meaning the recipient has zero obligation to repay the entity providing the funds. These entities can be government bodies, charities, private institutions or even individuals.
Depending on your lender and what other financing options are available in your area, you might be able to secure a second, low-interest loan in addition to your mortgage. The funds from this loan can be used to cover the costs of a down payment, or other mortgage expenses and closing costs.
Just like with your mortgage, a low-interest loan would come with its own amortization schedule and use your home as collateral. Low-interest financing might help get your mortgage across the finish line, but you’ll be making two mortgage payments each month.
Another assistance program that places a second mortgage on your new property is a forgivable loan. These loans are structured with a “forgiveness period,” stipulating that the lender does not need to be paid back as long as you don't move for a given number of years.
Typically, lenders establish this period as 5 years, but they do have the option to extend the period as much as 20 years. This type of financing usually comes with an interest rate of 0%.
However, if you were to move before the forgiveness period concludes, you’ll be on the hook for the entire loan amount. If you do decide to use forgivable loans for down payment assistance, you’ll want to be certain about your intentions to stay in the home for a while.
Matched savings programs
Individual development plans, or matched savings programs, are yet another option you’ll have for down payment assistance. Using this approach, you would make regular deposits to either a bank, community organization or government agency. That institution would in turn match whatever amount you handed over to the account. Eventually, you could use the full amount of funds in the account to help cover the costs of a down payment.
With a matched savings program, you can effectively double your savings. With $3,000 deposited into one of these accounts, the organization or government agency would contribute an additional $3,000, giving you access to $6,000 for any mortgage expenses.
Down payments & types of mortgages
While conventional mortgages typically require at least 20% of the sales price for a down payment with no PMI, there are home loan options that can lower this threshold.
If you’re having trouble qualifying for a down payment assistance program, some mortgage programs can offer varying down payment requirements. Let’s take a closer look at some of these loans and whether you might qualify for the benefits they offer:
- FHA loans
- USDA loans
- VA loans
Down payment assistance through a second mortgage might be harder to secure if you’ve had financial hardships in the past. If you’re looking to buy a home but don’t have the capital for a typical down payment, or the credit for a second loan, FHA mortgages might be a good choice.
Since these loans are insured by the government, lenders can lower the threshold toward certain requirements when approving a loan like the down payment. With a portion of their financing insured, banks can be more flexible with their mortgage approval terms, creating new paths to homeownership for borrowers who apply for an FHA loan.
FHA loan applicants with a credit score of 580 or higher can qualify for options with a 3.5% down payment option. With an even lower credit score, maybe in the 500-570 range, you might have to contribute at least 10% for a down payment on the home.
Similar to FHA loans, USDA loans are designed to make it easier for qualifying families to invest in a home. Backed by the U.S. Department of Agriculture, USDA loans also assure creditors that their portion of the sales price is insured, allowing them to be more lenient toward approval.
Usually intended for buyers in rural neighborhoods, meeting the criteria for this type of financing means you could secure a USDA home loan with no down payment requirement.
If you’re a retired or actively serving military member, the VA loan program allows lenders to approve mortgages with more flexible eligibility requirements and zero down payment requirements.
As an eligible VA loan applicant, you’ll save thousands by skipping the down payment altogether while also benefiting from comparatively lower interest rates that can only be accessed through a VA loan.
You can look up all the down payment assistance programs available in your area at DownPaymentResource.com.
Down payments might present the largest barrier to entry for prospective buyers, but there are plenty of viable assistance programs available. Depending on your financial background and how much mortgage you can afford, this upfront expense can be made much less daunting.
Assistance programs might vary from area to area, so it’s always best to do your own research to find what plan suits your needs. Meeting with a loan officer could also help clear any confusion and identify your best approach to buying a home.