Down payment Assistance Grants: Everything you need to know

Intro:

While many Americans are interested in homeownership, a good portion of them often find roadblocks when trying to achieve that most American of dreams. A 2019 National Housing and Financial Housing Survey revealed that around 70% of US adults find the home buying process too complicated.

Many would-be home buyers have to contend with raising the down payment amount, which can be anything from 5 percent to 20 percent. Of course, a large down payment is a reliable way to ensure a relatively painless future of mortgage payments. However, a down payment can still be a major stumbling block for many potential home buyers.

Luckily, many states, counties, and cities across America offer down payment assistance (DPA) programs in the form of grants and no-interest loans to home buyers. This kind of assistance helps would-be homeowners cover their down payments and other costs such as closing costs.

How Down Payment Programs Work

Down payments are crucial if you are to secure an affordable loan with manageable interest payments. Twenty percent seems to be the magic number for most banks. But as recent surveys show, down payments get in the way of many potential homeowners. A 2018 survey revealed that 53 percent of millennials said they couldn’t afford down payments.

However, DAP programs can help lessen this burden for many potential homeowners. They may come in different forms, including grants, which are essentially one-time gifts that help to cover the down payment or the closing costs, and which don’t have to be repaid.

Low-interest loans, which are spread out throughout the mortgage period, cover down payments and closing costs. But they must be repaid in a few years.

Forgivable loans typically expire after a set period of time, and when certain conditions are met. Deferred-payment loans are no-interest loans that are generally repaid when certain thresholds are met. (Source)

Down payment assistance grants give you upfront cash to help you kickstart the home buying process. They also cover the closing costs, which typically fall between 2 and 5 percent of the principal loan amount. Closing fees are an upfront requirement and,  depending on the total value of the home, can present an extra hurdle to a potential home buyer.

DPA from the National Homebuyer’s Fund.

The good news is that the National Homebuyer’s Fund (NHF) provides a non-repayable DPA grant of up to 5 percent of the total loan amount. Since the grant never has to be repaid, it significantly lowers the amount of debt a homeowner has to undertake.

Homebuyers can choose from two NHF provides two programs, both of which have different sets of requirements; the NHF Sapphire Program, and the Golden State Finance Authority Platinum Program. (Source)

The NHF DPA grant is available in 50 states and has a few notable details worth noting;

• You will have to use one of the pre-approved participating lenders to access the grant.
• You can use the grant with any loan type, whether it is a conventional mortgage loan, a Federal Housing Administration loan, a Veterans Administration loan, or a US Department of Agriculture loan.
• You will have to make the home your primary residence for a minimum of three years (Source)

Who Qualifies?

DPA grants are typically designed for first time home buyers. However, some grants are also accessible to previous homeowners. Other DPA programs even define a new home buyer as one who hasn’t bought a home in the last three years.

To qualify for any DPA program, you have to be eligible for a mortgage loan first. Before undertaking any grant application, you’d do well to get prequalified with a financier to be doubly sure you qualify for the grant. Note that some federal funded grants may also require that you undertake a HUD-approved housing counseling class. (Source)

Other factors may also influence your eligibility for various DPA programs. They include your debt-to-income ratio, your credit score, completion of a homebuyer education program, veteran or military status, and whether you are currently in a public service position, value of the home, or other state-specific guidelines. (Source)

Amount of Assistance Available

The amount of down payment assistance grants may vary between different states, cities, or counties. In Iowa, for instance, a FirstHome program provides two options; a DPA grant of $2,500 to cover the down payment and closing costs, or a second loan program that offers a loan of up to 5% of the home’s value. The loan is capped at $5,000 and is repayable when you sell the house, refinance, or complete your first mortgage in full. There are no monthly payments. (Source).

New Jersey’s state-wide DPA program can provide up to $10,000 to first time home buyers to offset their down payment and other closing costs when they buy a home within the state. The assistance is basically an interest-free, 5-year, forgivable loan with no monthly payments. (Source)

The Washington State Housing Finance Commission (WSHFC) works to lower the down payment barrier for many homebuyers in the state. It provides DPA loans to home buyers who use any of its mortgage programs. If you qualify for a home loan, your household income is below the $145,000 program limits, and your credit score is 620 and above, you most likely qualify for down payment assistance. Depending on the program, the interest rate varies from 0 to 4 percent. (Source)

DPA Programs by Lenders

Some lenders, such as Bank of America, have their own home grant programs. Through its Community Homeownership Commitment™ program, the bank provides a lender credit of up to $7,500, which can be used to cover some of the non-recurring closing costs such as insurance, recording fees, or even to buy down the interest rates permanently. Homebuyers are not required to pay back the funds.

Bank of America also runs a Down Payment Grant program that provides a grant of up to $10,000 or 3 percent of the home’s purchase value. These funds don’t require repayment and can be used for a down payment is pre-selected markets. (Source)

Application Process

Federal, state, and local governments have a long history of promoting homeownership. An increasing number of homeowners is generally good news, and therefore, state housing agencies across the US help many homebuyers get over the initial hurdle of down payments.

However, for you to access these assistance programs, you’ll have to know if they exist. The first step is to explore the various down payment assistance programs in your state, city, or area. You can check out the DPA programs within your state or where you intend to purchase the home.

The next step is to check with your city or county authorities if there are any specific assistance or local grants programs. You can visit the offices, make a phone call or simply check out their website to learn about the requirements or whether you are eligible for any of the programs.

Finally, find out if the grants or assistance programs only work with specific or pre-approved mortgage providers. Local agencies often recommend lenders or experienced loan officers who have helped many people access the grants they dispense.

Alternative Forms of Down Payment

Unfortunately, now everyone meets the eligibility requirements of DPA programs. But there are other viable options you can consider for home-buying assistance. The United States Department of Housing and Urban Development (HUD.gov) may have other housing programs for which you would be eligible. Select your state and get homeownership resources and information about alternative DPA programs in your area.

Your family members can also be a source of assistance. A parent or any legal relative may give you a cash gift for a down payment. However, it isn’t as simple as receiving a wad of cash with a cute note. Down payment gifts have rules and must be properly documented to avoid future problems for both you and the giver.

Other home assistance programs address specific needs such as disaster relief, utility bills, or particular community members, such as veterans and seniors. Depending on your location, you may be eligible for other home assistance resources.

You may also consider a low or zero-down mortgage if you have limited cash for a down payment. With the right program, you can still kickstart the process of buying a home without having to put down some cash upfront.

Advantages and Disadvantages of Down Payment Programs

The biggest advantage of DPA programs is that they help offset the initial hurdle of having to raise cash upfront before purchasing a home. Grants particularly lower the obligation and debt amount since you don’t have to pay them back.

Disadvantages

DPA programs may also attract higher costs down over the course of the mortgage, particularly the ones that require you to work with particular lenders. Mortgage programs that also provide their own DPA programs may also charge higher interest rates.