Not everyone has the funds saved up to make a big enough down payment on a home. If you’re a first-time home buyer, the good news is that you may qualify for down payment assistance through state or local programs.
Down payment assistance has many advantages and disadvantages, but these programs can help put home buying within reach for those who qualify.
Here’s what you need to know about down payment assistance and how it can help make homeownership possible.
What is down payment assistance and how does it work?
Buying a home typically requires buyers to pay a down payment, which is part of the purchase price of a home that you pay up front. Down payment assistance, which is generally reserved for first-time home buyers, is any program or financing that helps buyers reduce the amount they need to save for a down payment.
DPA programs are offered nationwide by state, county, and city governments, nonprofit organizations, or directly through the lender. Depending on the Down Payment Assistance (PAD) program, you may receive a grant or low-interest loan to use for your down payment. Some DPA programs also allow buyers to use the funds to cover closing costs.
Common types of down payment assistance include:
- Subsidies : A grant is a gift of money that can be used for a down payment. Grants do not have to be repaid. However, some programs may use the term “grant” but have repayment requirements.
- Low interest loans: This sum is repaid at the same time as your regular mortgage payment over a fixed period of time.
- Deferred loans: These loans are usually interest-free and don’t have to be repaid until you sell, refinance, or the mortgage reaches the end of its term.
- Repayable loans: Forgivable loans expire after a certain period of time, which means they do not have to be repaid. However, this is only true if you own the home and make timely mortgage payments.
Who is eligible for down payment assistance?
Down payment assistance is generally only available to first-time home buyers; however, being a first-time homebuyer doesn’t necessarily mean it’s your first purchase. You may qualify as a first-time home buyer if you do not own a principal residence during the three-year period ending on the date of purchase of the new home.
Qualification may also depend on your household income and credit history. The purchase price of the property and its location may also be considered for certain down payment assistance programs.
Each DPA program is different, so be sure to check with the program if you are unsure of your eligibility.
If you’re ready to become a homeowner, check out Total Mortgage. You can apply for a loan online and get a free quote.
How long does it take to get down payment assistance?
The time it takes to get down payment assistance depends on the program. Each DPA program has its own process, so the speed varies.
Don’t be surprised if closing your mortgage takes longer. Since these programs must work with your lender, down payment assistance could also affect your closing timeline.
Advantages and disadvantages of down payment assistance
It’s important to weigh the pros and cons of down payment assistance before deciding if it’s right for you. Here are some key points to keep in mind.
Benefits of down payment assistance
- You can buy a house earlier. For conventional loans, you can put down as little as 3%. But on a $300,000 mortgage, that works out to $9,000. Without down payment assistance, it could take months or years before you can save enough for a down payment.
- You may be able to avoid private mortgage insurance (PMI). If the down payment assistance program gives you enough to put 20% on the house, you could potentially avoid paying PMI.
- You may qualify for better mortgage terms. A larger down payment lowers your loan-to-value (LTV) ratio. By lowering your level of risk, you could be offered a better interest rate on your mortgage.
- You can keep more money in your pocket after closing. By using down payment assistance, you can save more money upfront instead of putting all of your savings into your down payment.
Disadvantages of down payment assistance
- It could cost you more over time. If you use an interest-bearing loan, you could spend more to pay it back than if you didn’t use assistance.
- You could surpass yourself. Help may allow you to buy a more expensive home, but it could add financial stress later.
- Closing may take longer. Down payment assistance adds an extra step to the mortgage process. This could push the closing date further than it would have been without help.
- The program may require you to live in the home for a number of years. For certain types of help to be forgiven, you may need to occupy the accommodation for a period of time.
Do you have to repay the down payment assistance?
Down payment assistance isn’t always free money. Whether or not you have to repay the down payment assistance depends on the program. Each program has different conditions, so it is important to pay attention to the details.
Low-interest loans and deferred loans usually need to be repaid, but grants and forgivable loans may not need to be repaid. However, you may need to meet certain conditions for the loan to be repayable.
How much do you get for down payment assistance?
The amount you get for down payment assistance depends on the program. Some may offer a lump sum while others may offer a percentage of the purchase price of the home.
For example, MassHousing covers 10% of the purchase price of a home for up to $50,000 in down payment assistance if you buy a home in certain communities or up to $30,000 elsewhere in the state. Meanwhile, the Connecticut Housing Finance Authority (CHFA) is offering a down payment assistance loan of up to $20,000.
Need real estate financing? Consider the total mortgage
Down payment assistance is not for everyone. There are many pros and cons to down payment assistance and each program comes with its own set of eligibility requirements. Be sure to consider all of your options and the long-term consequences of accepting help.
Looking for the right mortgage product? At Total Mortgage, we have mortgage experts across the country to help you with your home buying needs. Find a Total Mortgage office in your area today to explore your options.