A beginner’s guide to down payment assistance
August 17, 2017
Between record-high rents and student loan debt, many of us have trouble saving at all, never mind what we think we'll need for a down payment on a house. Nearly 70 percent of renters in a Zillow survey cited the down payment as their number one barrier to homeownership. Not surprising.
The truth is you may not have to save as much as you're thinking, and there's actually free money out there that might get you where you need to be right now. It's called down payment assistance, and there's quite a bit of it. Closing cost assistance too. Grants, low-interest or deferred loans, forgivable loans … And you might be more eligible than you think. Income caps are higher than they used to be.
Where's the catch? You have to track down the program that’s right for you from the many administered by housing finance agencies, nonprofits, lenders, cities, and counties, among others. It can take a lot of digging.
The good news: We did the research and put together this overview of what’s out there to help get you started. Our list is far from exhaustive, and we haven't gone into each program’s restrictions, pros, and cons. But if nothing else, we hope it will put a little pep in your homebuying step.
First of all, you don't need 20 percent down
It’s great to have a big down payment. The more you put down, the less you need to finance and pay mortgage insurance on, and the smaller your monthly mortgage payment will be.
But in case you haven’t heard, the traditional 20 percent is no longer the norm. According to Down Payment Resource, the median down payment for first-time homebuyers in 2016 was just 4 percent.
Watch for restrictions
Any given down payment assistance program is going to come with one or more restrictions. So look closely at each one before you get too excited.
Here are some common restrictions that might apply:
- First-time buyers only, although this is hardly universal, and the term “first-time” buyer refers to those who haven’t owned a home in the last three years (kind of a misnomer, and in this case it works to your advantage if you have owned a home before)
- Income restrictions, but the cut-offs are rising
- A minimum contribution from you
- Limits on the purchase price, almost always
- You will have to live in the home for a certain number of years, or you might have to pay back the aid
- Must be paired with a certain loan product
- A higher mortgage insurance expense
Low down payment mortgages
Here are the big low down payment programs offered through traditional lenders. Again, these aren’t the only ones.
FHA loans. You don’t have to be a first-time homebuyer, but about half of first-timers rely on Federal Housing Administration mortgages. Because the FHA insures them, lenders can offer better interest rates and more flexible requirements. As long as your credit score is at least 580, your down payment can be as low as 3.5 percent. And there aren’t any income restrictions. For details, check out this article at The Balance. You can find an FHA lender with this HUD.gov search tool.
Fannie Mae’s HomeReady® Mortgage. The HomeReady Mortgage lets first-time and repeat buyers put down as little as 3 percent. When you're ready to start shopping for a mortgage, ask your lender about HomeReady and other affordable financing options for you to consider.
Freddie Mac’s Home Possible® Advantage Mortgage. The Home Possible Advantage Mortgage also lets first-time and repeat buyers put down as little as 3 percent. When you're ready to start shopping for a mortgage, ask your lender about Home Possible and other affordable financing options for you to consider.
Employer-assisted housing programs
Are you facing a long commute if you want to buy a home, because property is too expensive in your city? Some large employers, such as governments, universities, and major companies, assist employees in their purchase of a home close to where they work. These programs can help attract and retain employees. After all, two hours in the car every day can put a serious dent in your happiness, not to mention your productivity.
Are you a community service professional?
It's a widely held belief that community service professionals should be able to live in the communities they serve. So you’ll find a variety of programs aimed at helping police officers, firefighters, teachers, health care workers, and social workers get into homes. Here are just two:
Everyday Hero Housing Assistance Fund. Denver-based EHHAF offers gift funds that cover closing costs to community service workers in all 50 states. That’s right, gift. The goal is to keep your out-of-pocket costs to a minimum. Learn more at usehhaf.org.
Good Neighbor Next Door. This HUD program gives a range of community service professionals a 50 percent discount on certain properties in revitalization areas. The down payment is only $100 if you qualify for any FHA-insured mortgage program. Learn more at the HUD website.
Military and veterans
If you’re a veteran, active-duty service member, member of the National Guard and Reserves, or surviving spouse, special homebuying programs are one thank-you for your service.
Veterans Administration loans. By guaranteeing the loan, the US Department of Veterans Affairs might help you buy a home at a competitive interest rate with no down payment and no private mortgage insurance. Learn more at the VA website.
Military Housing Assistance Fund. Like the Everyday Hero Housing Assistance Fund, its sister program for community service workers, MHAF offers gift funds that cover closing costs. This will keep your out-of-pocket costs to a minimum. Learn more at usmhaf.org.
Is your demographic working for you?
Native Americans, people with disabilities, and rural Americans are among the beneficiaries of demographic-based programs.
Indian Home Loan Guarantee Program. This HUD-backed mortgage product is designed for American Indian and Alaska Native families, Alaska villages, tribes, or tribally designated housing entities. It can get you into a home with a low down payment and flexible underwriting. Learn more at the HUD website.
Native American Homeownership Initiative. In more than a dozen states and territories, the Federal Home Loan Bank of Des Moines provides up to $15,000 per eligible household to assist with down payment, closing costs, homeownership counseling, and home repairs associated with the purchase. Learn more at fhlbdm.com.
Programs for disabled homebuyers. A lot of aid for disabled people is directed at rental aid, but homebuyer programs do exist. This Bankrate article offers a partial list. An exciting option if you can wait awhile is Habitat for Humanity, which is known for disability inclusion. Imagine building a home customized to your needs! Start your visit to Habitat.org with this success story.
USDA Rural Development Loans. Zero down payment? Yes, as in 100 percent financing. The US Department of Agriculture's rural development mortgage guarantee program is so popular that it has been known to run out of money before the end of the fiscal year. It’s intended for first-time buyers, but there are exceptions. Check out the USDA website to see if your blessedly unpopulated area is eligible.
Your city or state might help out
There are all kinds of community and state programs that help with down payments and other upfront costs, including closing costs. Some cities offer financial incentives to buy a home within their boundaries, often in a designated “redevelopment” neighborhood. Chicago, Boston, Los Angeles, and Seattle are just a few of the major cities that have homebuyer assistance programs.
You’ll need help with your research
We recommend that you take advantage of both of these great options:
A local homeownership advisor. Some programs, especially smaller city or county ones, aren’t well known. So it pays to talk to a professional whose job it is to keep tabs on these things. You can find a good homeownership advisor (also called a housing counselor) near you on our lookup page.
Down Payment Resource. DPR’s free online database makes it way easier to find down payment programs and other financial help (you’ll have to give up your name and email). They continually monitor more than 2,400 homeownership programs nationwide, along with ever-changing eligibility requirements. To learn more about DPR, start with our interview with CEO Rob Chrane.
Good luck and keep saving. You can do this!
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Filed Under: For Homebuyers