As housing prices continue to increase and income growth stalls, it’s becoming more and more difficult for many to save enough money for a down payment on a home. For some, it may make homeownership seem out of reach, but chances are it’s a lot closer than they realize.
Many people are unaware that there are over 2,500 down payment assistance programs available to support homebuyers, making the dream of owning a home more attainable. Let’s explore how down payment assistance works and what programs may be available when buying a home.
How down payment assistance programs work
Down payment assistance programs provide homebuyers with some or all of the funds needed for a down payment. They are aimed at people who would otherwise not be able to afford the down payment, especially first time buyers.
Run by charities, private companies, as well as state, city and government authorities, each program is structured slightly differently. There are various forms of down payment assistance, all with different qualification and repayment conditions.
Assistance amounts can vary, with some programs offering a few thousand dollars, and others running all the way up to $10,000 or more. A number of down payment assistance programs are targeted at first time buyers or provide assistance to those who reside in specific geographical areas or who hold certain careers. Some are restricted according to family size or loan amount. Others may have income limits, meaning if you make over a certain amount of money you would not qualify.
Nearly all programs have a minimum required credit score which is around the 620-660 range, as well as a minimum debt-to-income ratio.
It’s not uncommon for a program to require the homeowner to stay in the home for a set period of time such as three, five, or 10 years. If the homeowner moves or sells before this time they could be required to repay the down payment assistance in full, even if it was provided as a grant or forgivable second mortgage.
Down payment assistance programs are typically structured in one of the following ways:
- As a grant which typically never has to be repaid.
- As a second mortgage, often with a lower interest rate, that is paid back in conjunction with the first mortgage.
- As a second mortgage that delays payments until the homeowner moves, sells, refinances, or pays off the first mortgage -- at which time, payment in full is required.
- As a forgivable second mortgage. This only has to be repaid if the homeowner moves, sells, refinances, or pays off the first mortgage before the funds are fully forgiven -- usually a set period of between five and 20 years.
- As part of an equity sharing program like Unison, where no monthly payments are required, but a portion of future equity is shared.
Since each program is distinct, it is important that you find the right one one for you, from the qualification requirements, to the down payment assistance amount and repayment terms. Look at what programs are available in your area and make sure you carefully review the program guidelines and qualification requirements of each one.