Down Payment Assistance Loans
WHAT ARE DOWN PAYMENT ASSISTANCE (DPA) LOANS?
Down Payment Assistance loans or DPA loans are initiatives to help with down payment assistance, sponsored by the federal, state, and local governments and private non-profit organizations. These loans include no-interest loans and forgivable loans. These groups offer grants to homeowners who are looking for a bit of assistance.
These programs may not be for everyone; for example, you would not be able to take advantage of the down payment assistance program if you are not pre-approved for a mortgage and to qualify for a mortgage, you will need to have a stable job, good credit scores and a high income. A down payment assistance loan may be an option if your down payment is what is holding you back from purchasing a home.
A down payment is a lump sum of money equal to a portion of the final price of your home. There will be a range of down payments, and some mortgage programs do not require any. Although there are many options, it is not easy to come up with cash.
As the name implies, down payment assistance helps you pay your down payment when you are a first-time homeowner.
HOW DOES PAYMENT ASSISTANCE WORK?
Programs that provide down payment assistance (DPA) help home buyers to get loans or grants that can reduce the amount they have to save for a down payment.
Grants, loans and other programs are helpful when you help with down payment assistance. The assistance is usually reserved for first-time buyers only. These can be managed by many organizations such as the local or state housing authority or a non-profit.
Your income and credit history will determine your eligibility, which varies from one program to the next. Sometimes, you may be required to take training about the mortgage process and to manage your finances.
The program will determine how much assistance you will receive. Some programs allow you to receive a percentage of the sale price of your home, while others limit assistance to a dollar amount. Research the requirements of each program before you apply. Find out if it is a loan or grant and how much assistance they can provide.
If you are eligible, you may be awarded an outright grant or a loan with low or no interest to pay your down payment. You can also use some DPA funds to cover closing costs; most DPA programs are offered locally. Eligibility requirements can vary between programs.
DPAs often require you to be a first-time homebuyer, which means you must have a good credit score, a moderate income and a decent credit rating. These rules may not apply to all DPAs.
You should also be aware that DPA programs often have a list containing ‘participating lender.’ You may need to select a lender approved by your assistance program.
WHO IS ELIGIBLE FOR DOWN PAYMENT ASSISTANCE?
Many down payment assistance programs are targeted at first-time homebuyers. According to Down Payment Resource, which tracks over 2,000 homeownership programs, 38% of these programs are also available to repeat buyers.
You do not necessarily have to be a first-time buyer to qualify for a program. The programs typically define a “first-time buyer” as someone who has not owned a house in three years.
Some programs are targeted at specific groups such as teachers and police officers, emergency workers, or city employees.
There are many requirements for down payment assistance programs. However, the most common are:
- Attend a homebuyer course,
- Meet income limits. Many programs are designed for residents with low or moderate incomes. A borrower must have a household income below a specified threshold,
- Buy in a licensed location,
- Keep your purchase price below the maximum home price, which is typically a percentage of an area’s median home price,
- Contribute some money to the purchase.
You will need a minimum credit score of 620 and an income that meets the program’s requirements. Your debt-to-income (DTI) ratio is also an essential factor in many programs. Additional requirements may vary depending on the program. These requirements may include:
- The home must be located in a particular area or county,
- You must be a first-time homeowner,
- A class on finances and homebuying is mandatory,
- You must stay in your home for a set number of years, usually 3-10 years,
- A minimum contribution of $1,000 will be required towards the acquisition costs,
- The minimum down payment for your home must be between 3% to 3.50%. Your lender will help you determine the down payment needed for your mortgage loan. They will also verify your ability to repay your first mortgage and DPA loan.
HOW TO APPLY FOR MORTGAGE DOWN PAYMENT ASSISTANCE?
To learn more about the down payment assistance requirements and to obtain a list of approved mortgage lenders, visit the website of your local government agency. Additionally, you can also ask a lender to help you get a mortgage. Local agencies might be able to recommend loan officers with experience in helping applicants apply for grants.
WHO QUALIFIES FOR FIRST-TIME HOMEBUYERS?
Many government and charity programs have stringent criteria for who is a first-time homeowner. Most state, federal, and non-profit programs will consider you a first-time buyer if you do not have any homeownership within the past three years.
Even if you do not live in the property, you cannot have any rental property or investment property that will qualify for first-time homebuyer assistance.
Most assistance is provided by first-time homebuyer loans and grants offered at the local and state levels. Depending on where you live, you may also be eligible for funds from the non-profit sector or private sector.
- Grants: Grants are the best form of down payment assistance. Grants are money that the homeowners do not have to repay. They are simply a gift of money similar to a scholarship grant.
- Repayable Loans at 0% Interest: Forgivable mortgage loans can be second mortgages that you do not have to repay as long as your home is occupied for a certain number of years. The interest rate on these loans is 0%. Lenders will forgive them, so owners do not have to repay them for a set amount of years. Lenders will often forgive the loan after five years. However, they have the option to not forgive these loans for more extended periods, such as up to 15 years or 20 years. If you move out within the forgiveness period, however, you will have to repay these loans. If your lender claims they will forgive your loan in 5 years, and you move out, refinance or sell your house within four years, then you will have to repay all or part of the forgivable loan. The second mortgage will typically be sufficient to cover your entire down payment.
- Deferred Payment Loans (At Zero Interest): A deferred payment may be available for you if you qualify for a second mortgage. These second loans do not require you to repay them, but they can be sufficient to cover your down payment until you sell your home, refinance or pay off your first loan. However, these loans cannot be forgiven, and you will need to repay them if your home is ever sold. The repayment is usually made through the proceeds of selling your home.
- Low-Interest loans: You might be offered the chance to get a second mortgage loan by your lender or another organization. It would allow you to pay off your first mortgage, and the loan funds can be used to pay your down payment. The repayment is made every month. You usually pay your first loan payment, which means that you will have to make two mortgage payments per month. These loans should have a low-interest rate. Some lenders or organizations may offer these second loans with no interest.
- Matched Savings Programs: Homeowners can also use matched savings programs (also known as individual development account) to help them pay their down payments. Homebuyers can deposit money to an account at a bank, government agency, or community organization through such programs. The institution will match any amount that the buyers deposit. Buyers can then use the total funds to cover down payments. Buyers might deposit $7,000 in an account, for example. The account will be credited with $7,000 by the bank, government agency, or community group, and this $14000 can be used by buyers to pay for their down payment.
BENEFITS OF DPA:
- Financing to pay down the deposit and cover closing costs
- Up to $20,000 in Home Purchase Assistance
- For loan reservations from April 30, 2021, to December 31, 2021, a low-interest second mortgage is available at 1.00% (1.10%-1.50% APR).
HOW CAN DOWN PAYMENT ASSISTANCE PROGRAMS BE HELPFUL?
These programs are designed to assist homebuyers in securing a down payment or closing costs.
There are three main types of down payment assistance:
- The qualified homebuyer must repay the interest-bearing loan.
- Homebuyers can get interest-free loans that do not have to be repaid but are free of additional costs.
- Grants are funds that the home buyer does not have to repay.
Forgivable loans are a hybrid type of assistance. If the borrower lives in the house for a specified period, these loans are not required to be repaid. These loans have a 30-year fixed-rate and are charged at market rates.
You may be limited in the amount of down payment assistance you would receive based on your eligibility. A borrower might be limited to receiving up to 5% of the property’s value through the assistance program.
According to the Urban Institute’s survey, eligible borrowers may be eligible for between $2,000 and $39,000 in down payment assistance.
Sometimes, the down payment assistance would not cover the entire down payment. Sometimes, the borrower will need to have enough cash available to pay for the deal.
HOW DO I FIND DOWN PAYMENT ASSISTANCE PROGRAMS?
You can search for DPA programs at these places:
- Your state housing finance authority.
- Your local and county governments: Many counties and cities offer assistance with down payments and other programs that can help homeowners.
- The U.S. Department of Housing and Urban Development (HUD).
- HUD-approved housing counselors: You can find a housing counselor near you using the Consumer Financial Protection Bureau’s tool.
- The Down Payment Resource: It offers an online tool that allows you to search for home buyer programs in your local area.
How to Locate Down Payment Assistance Programs?
There are over 2,500 down payment assistance programs. Most of these programs are at the state or local level. There are more than 1,300 cities and counties that offer down payment assistance. The requirements for each can vary depending on the situation, but there are some commonalities. Low-income homebuyers are most likely to get accepted. There may be many preferences, as well as restrictions.
There are many ways to find down payment assistance programs close to you:
- Interview mortgage lenders: Ask three to five lenders if they are willing to participate in at minimum one down payment assistance program. They will be able to discuss eligibility and program terms.
- You can do your research online: You can find an online index of the U.S. Department of Housing and Urban Development (HUD), including local down payment assistance programs.
- Attend a homebuyer education course: You will learn about down payment assistance options as part of the course. HUD has an index of local and state homebuyer programs that you can use to find programs. All down payment assistance programs may not accept some homebuyer education programs. It is best to choose one offered or endorsed only by the down payment help program that might interest you.
Some Down Payment Assistance (DPA) Program Options:
These are eight programs that can help you pay down your down payment as a first-time homeowner.
- Chenoa Fund: The Chenoa Fund is a nationwide source of down payment assistance, except in New York. The Chenoa Fund is a program for affordable housing administered by the CBC Mortgage Agency (CBCMA), a federally chartered government agency. The Chenoa Fund offers up to 3.5% down payment assistance, which is the down payment required for an FHA loan. A second mortgage can also be granted if you have a minimum FICO score of 620 and a DTI below 45%. There is no interest or payment, and the mortgage will be forgiven if your income is below 115% of the area’s median income. The DPA must be repaid if you earn more than 115% of the area’s median household income. You will get a second chance to get your loan forgiven if you pay late on your mortgage payments. The period can be reset, and your mortgage will still be forgiven, provided you continue to make timely payments over the next 36 months.
- Community Seconds: Fannie Mae approved Community Seconds. The second mortgage allows homebuyers the opportunity to use funds from state and local governments, housing non-profits, and other sources to make a down payment and get assistance with closing costs. For more information about closing costs assistance and down payment assistance, contact your local HUD office.
- HUD Home Programs: The U.S. Department of Housing and Urban Development (or HUD) is the most potent agency in housing matters. The HUD provides housing assistance directly to Americans in need. Through its programs, it encourages responsible homeownership. HUD sells foreclosed properties and sponsors programs (described below) that make it possible for low- and moderate-income people to purchase homes. The Federal Housing Administration (FHA) is housed in HUD. Private lenders can apply for mortgages funded by the FHA. HUD and FHA are not the only loan programs available. The Veteran’s Administration (V.A.) and the U.S. Department of Agriculture (USDA) offer loans that guarantee private lenders, which is not a method of down payment assistance, but it can be used to purchase a discounted home with 3.5% down (if eligible for an FHA mortgage). A HUD house is a great bargain if you are looking for a low-cost option. HUD houses are homes that were purchased last with an FHA loan. The government now owns these properties, and HUD manages them till they are sold. HUD houses are sold “as is,” which means the government does not offer warranties or undertake repairs. It is strongly recommended that potential buyers conduct a thorough inspection of their homes to understand what they are buying. You may be eligible to finance renovations by combining an FHA 203 (k) loan with a HUD mortgage and rolled into one monthly payment. HUD also offers special homebuying programs.
- Government-Sponsered Entities: Fannie Mae, Freddie Mac and other government-sponsored entities work together to purchase loans from origination to keep lenders solvent and encourage homeowners to be low- and medium-income. To sell Fannie Mae and Freddie Mac their mortgages, lenders must satisfy the requirements of Fannie Mae and Freddie Mac which will allow them to have the liquidity to issue future mortgages. Fannie Mae‘s participation in the Community Seconds program allows lenders to originate primary mortgages with confidence.
- HomePath Homes: A HomePath property might be a good option for a first home buyer. Fannie Mae-owned properties are available to the public at a discounted price after the previous owner has defaulted on a Fannie Mae mortgage. A HomePath Home is an excellent option for your first home purchase. It offers low down payments and eligibility for the HomeStyle renovation loan. The closing cost assistance is up to 3% of the purchase price, which is the most attractive to those who take the HomeReady online homeownership course and eventually buy a HomePath property. If you buy a HomePath house for $200,000, you can get a credit of up to $6,000 for closing costs.
- FHA Loans: Although loans insured by government agencies, such as V.A. and FHA loans, are not considered down payment assistance programs, they can be used to finance the purchase of a home. The government usually guarantees these loans and allows buyers to make lower down payments even with less than perfect credit. First-time buyers who are worried about coming up with thousands of dollars in closing costs can find this helpful. FHA loans are guaranteed by the Federal Housing Administration (a division of HUD). If your credit score is at least 580, an FHA loan can allow you to buy a house with only 3.5% down. A credit score of 500 or lower may allow you to be approved if you can afford a 10% downpayment.
- USDA Loans: USDA loans are available for purchasing homes in rural and suburban areas. Your home must be located in an area that the USDA considers “adequately remote.” It must also not exceed 115% of your county median income. A USDA loan can be used to purchase a home without a down payment.
- V.A. Loans: V.A. loans are home loans available to current military personnel, veterans, and spouses of service personnel who have died. Before you can apply for a V.A. loan, you must fulfill specific service requirements. A VA loan is similar to a USDA loan. It allows you to purchase a home without any money down.
DPA programs can be compared to a lottery for ZIP codes. You could get in line for free, depending on where you are looking to buy. You could get a second mortgage for a few thousand dollars. You can also get a grant for many thousands of dollars, which you will never need to repay. Some homeowners may be eligible for more help than others. You can only find out how much assistance you are eligible for by applying to local down payment assistance programs.
Are there any cost-free grants?
Some programs explicitly state that you can use their funds to cover closing costs in addition to your down payment. Other programs may have different rules. To find out if closing cost grants may be available, check your local down payment assistance programs.
Is DPA possible for manufactured houses?
There are many hurdles to overcome when trying to secure financing for a manufactured house. It all depends on how much you can pay down for a manufactured home.
FHA, VA, and conventional loans require that the manufactured home be secured on a foundation. Chattel loans are available for manufactured homes that are not secured to a foundation. Find out the requirements of your local down payment assistance programs. Contact your lender to find out if they are compatible with these programs.
Is additional DPA possible with FHA Loan?
FHA does not offer down payment assistance, but you might still be eligible for help through a program. FHA loans do not offer closing cost assistance. The maximum amount of assistance is 6%. FHA loans require you to contribute some of your funds, but most down payment programs work with FHA loans.