Down payments can be one of the most difficult parts of the home buying process. We all know that buying a home costs money! Fortunately, you don’t necessarily have to drain your savings account to get the amount. There are other ways to secure a down payment, including gift funds, grants, and down payment assistance programs.
We’ve listed these three options so you can decide if any of these options are right for your financial situation as you purchase a home. It’s important to understand that the rules for these forms of down payment assistance vary by state, region, and even city and are subject to change at any time.
What is down payment assistance?
Down payment assistance (DPA) refers to a variety of programs designed to help qualified homebuyers cover some or all of the upfront costs associated with purchasing a home. Depending on the program, assistance may come in the form of grants, forgivable loans, deferred loans, low-interest loans, or other financial assistance.
These programs are often offered through federal, state, local, nonprofit, or housing finance agencies and are intended to make homeownership more accessible to qualified borrowers. Program availability, eligibility requirements, and benefits vary based on where you buy a home and the mortgage program you choose.
Before we get into the details, there are two things you should know:
- Not all loan programs allow down payment assistance, gift funds, or grants. You will need to consult with your mortgage loan officer regarding loan programs.
- Down payment assistance usually only applies to primary housing. Although there are some exceptions to this rule, in general, you cannot purchase a second home or investment property using down payment assistance programs.
You don’t always need a 20% discount.
One of the biggest myths about home buying is that you need a 20% down payment. Many qualified home buyers purchase a home at a much lower cost, and down payment assistance programs may help reduce upfront costs even further. The right mortgage solution depends on your financial situation and the loan program you choose.
How do down payment assistance programs work?
Most down payment assistance programs work in conjunction with your mortgage rather than in replacement of it. Once you qualify for a mortgage, your loan counselor can help you determine whether you also qualify for one or more down payment assistance programs.
Depending on the program, assistance may help cover the following:
- Your down payment
- Closing costs
- both of them
Some programs provide money that never has to be repaid if certain requirements are met, while others are structured as second mortgages with deferred or low-interest payment terms.
Since every program is different, reviewing your options with an experienced loan advisor is one of the best ways to determine which solutions best fit your financial goals.
Each option has different eligibility requirements, documentation standards, and program guidelines. Your APM Loan Advisor can help you determine what solutions may be available based on your financial situation and where you are purchasing a home.
Gift boxes
“Gift” is one of the best four-letter words, and for good reason! We all love receiving money on special occasions like weddings, graduations, birthdays…or maybe it’s simply because we’re first-time homebuyers and a loved one wants to help us.
Either way, gift boxes are a great way to take some stress off of first-time homebuyers. However, there are some steps you need to follow if you plan to use a large cash gift for your down payment.
Let’s start with what a “large financial gift” really means. For conventional loans, it’s typically defined as any amount equal to more than half of your gross monthly qualifying income. For example, if you earn $3,800 per month, a large cash gift would be any single deposit of $1,900 or more. The gift standard for FHA or USDA loans is anything over 1% of the home’s purchase price, sales price, or appraisal value, whichever is less.
The mortgage loan application process typically involves 60 days of bank statements, which means the mortgage lender or guarantor will want to understand the origin of any large amounts that have not been accounted for in your asset and income history.
Don’t worry – this gift money can be easily identified by a gift letter indicating that this money is actually a gift and not a loan. The letter must contain the gift giver’s name, address, phone number, relationship to you, the dollar amount gifted, and the date of the gift. You may be asked to show a paper copy of the gift, so be sure to keep receipts and statements.
There are some criteria about who can give you money for a down payment. For conventional loans, this gift must come from a family member, which can include anyone from spouses and domestic partners to aunts, adopted cousins, or grandparents.
In addition to gifts from family members, FHA loans also allow you to receive gift funds from a close friend, employer, labor union, or charitable organization. USDA and VA loans allow you to receive gift money from almost anyone — as long as that person is not involved in the home transaction. This disqualifies the home seller, builder, developer, or real estate agent of either party.
Keep in mind that although you don’t have to pay taxes on gift funds, the person giving you the gift may do so, so it’s always wise to talk to a tax professional. Your loan officer will be happy to explain more about the gift fund requirements at any time.
Grants
Down payment grants can help bridge the gap between the money first-time homebuyers can put toward a down payment and the remaining balance. Down payment assistance grants are offered through government agencies such as the Department of Housing and Urban Development (HUD) and through nonprofit organizations such as the National Home Buyers Fund.
Who is eligible for down payment assistance grants?
Eligibility varies by program, but many scholarships take into account factors such as:
- Family income
- Credit file
- First-time homebuyer status (when applicable)
- Property location
- Occupancy requirements
- Purchase price limits
Some assistance programs are also available to repeat homebuyers or individuals working in professions such as education, health care, law enforcement, firefighting or emergency medical services.
Not every program requires you to be a first-time homebuyer, so it’s worth exploring all the options available.
Although these mortgage programs can vary by state, amount and requirements, they usually take into account the price of the home and geographic area, as well as your income and credit score.
Your loan officer will also know what these programs require, so be sure to ask if you’re interested in more information.
Generally, grant programs offer free and clear down payment assistance, which means you won’t have to pay money back (although you’ll want to read the fine print). Some programs require conditions such as a payback period, which means the money is free and clear only if you stay in the home for a set number of years.
Loans
Down payment assistance loans are a broad category that can mean different things. They can range from interest-free, forgivable loans to interest-free deferred payment loans and even loans with low interest rates. Some of these programs have eligibility requirements. This can include income limits, approved geographic locations, purchasing a home for less than the median home price set for that area, how much money you can put down for a down payment, and more.
Home buyer down payment assistance programs can come from:
- Federal agencies
- State agencies
- Regional organizations
- Community organizations
- Charitable funds
Many people are surprised to learn that “down payment help” doesn’t always mean free money. Some programs are structured as loans that may:
- It is completely tolerable after a certain number of years
- It does not require any monthly payments until the home is sold or refinanced
- Offering below-market interest rates
- Help cover down payment and qualifying closing costs
It’s important to understand how each program works before deciding which option best fits your long-term financial goals.
Additionally, some programs offer multiple options, including using these funds as payment for closing costs. For details on these types of programs and how to find them, Visit our blog.
How to apply for down payment assistance
The process of applying for down payment assistance usually begins with getting pre-approved for a mortgage.
Your APM Loan Advisor can help you with:
- Review available assistance programs
- Determine your eligibility
- Collect the required documents
- Complete any program-specific applications
- Coordinate your mortgage and assistance program throughout the home buying process
Because eligibility requirements and available financing can change, starting early gives you the best opportunity to explore all available options.
APM can help you navigate down payment assistance options
Although not every first-time home buyer will qualify for down payment assistance — or be lucky enough to have a generous relative — it’s worth considering. Checking out all of your options before spending your hard-earned money is a great way to put your mind at ease when it comes to down payments.
Your trusted APM Loan Officer is ready to help you find the solutions that will get you to the home of your dreams. Click here To locate an APM loan advisor near you.
Frequently asked questions about down payment assistance
What is down payment assistance?
Down payment assistance refers to financial programs that help qualifying homebuyers cover some or all of the down payment and, in some cases, closing costs. Help can be provided through grants, forgivable loans, deferred payment loans, or other housing assistance programs.
How do down payment assistance programs work?
Most programs work in conjunction with your mortgage. Qualifying buyers receive financial assistance to help reduce upfront costs, making homeownership more affordable.
What is the difference between a first-time homebuyer grant and a loan?
The scholarship generally does not require repayment if program requirements are met. A down payment assistance loan may require repayment immediately, over time, when the home is sold, or may be forgiven after specific occupancy requirements are met.
What are the eligibility requirements for down payment assistance?
Requirements vary by program but often include income limits, property location, occupancy requirements, purchase price limits, and minimum credit guidelines. Some programs are only available to first-time homebuyers, while others are open to repeat buyers.
What types of down payment assistance programs are available?
Programs may include:
- Down payment assistance grants
- Forgivable loans
- Deferred loans
- Low-interest second mortgage
- Closing cost assistance
- Employer-sponsored homebuyer programs
How do I apply for down payment assistance through my mortgage lender?
The first step is to speak with an experienced loan advisor. They can help identify available programs, determine eligibility, complete required documentation, and coordinate your mortgage application with the appropriate assistance program.
*Refinancing may result in finance fees that may be higher over the life of the loan. Consult your loan advisor for details.
