Down payment assistance: 3 options for homebuyers

Buying a house can be an exciting milestone. But there are some questions to consider when buying a home—like how a buyer can cover the cost of a down payment without breaking the bank.

You might be able to find down payment assistance through state and local agencies or other nonprofits. Learn more about three options and their eligibility requirements.

Key takeaways

  • Down payment assistance options are available to first-time and other eligible homebuyers.
  • Down payment assistance is usually administered at the local level through state governments and nonprofits, thanks in part to federal funding.
  • Grants, second mortgage loans and forgivable loans are the most common types of down payment assistance.

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What is down payment assistance?

Down payment assistance is money that can help cover some of the costs associated with purchasing a home. It’s typically given or loaned to first-time and other qualified homebuyers. Though the name might suggest the money goes only toward a down payment, many forms of assistance also help with closing costs.

State housing finance agencies (HFAs)—as well as local municipalities and nonprofits—typically distribute down payment assistance. But the funding for HFA down payment assistance often comes from the federal government. The Department of Housing and Urban Development (HUD) explains that “funds are given to states and certain municipalities that, in turn, distribute the funds to residents.”

3 types of down payment assistance for homebuyers

Down payment assistance might take the form of grants, loans or other programs. Eligibility can depend on where a person lives, how much they make, what kind of mortgage they have and whether it’s their first home purchase—among other things.

Here’s how the three types of down payment assistance work:

1. Grants

Many government agencies offer down payment assistance to eligible borrowers in the form of grants. These sums of money—which typically account for a small percentage of the purchase price of the house—usually don’t have to be repaid by the borrower. They also might cover closing costs. Try checking HUD’s list of programs by state to see what might be available where you live.

2. Second mortgage loans

Like a primary mortgage, second mortgages are amortized over the term of the loan. But in this type of home loan, the second mortgage is used to cover a down payment and closing costs. Depending on the program, the interest rate on the loan may be the same as or lower than the primary mortgage’s rate.

3. Forgivable second mortgage loans

Forgivable second mortgage loans—or “soft second” loans—may offer a 0% interest rate and a deferment period for the loan payments. This deferment can last until the homeowner refinances or sells the house. In some cases, the loans are forgivable if the homeowner meets the program’s requirements—often by owning the home for a certain period of time.

Who qualifies for down payment assistance?

Qualifications for down payment assistance vary by program. And it usually starts with being qualified—based on things like income and credit—for a mortgage. But there are a number of common criteria:

  • Being a first-time homebuyer
  • Attending a HUD-approved housing counseling class
  • Having a household income at or below the level set by the program
  • Planning to live in the home as a primary residence

While many programs target first-time homebuyers, some programs are available for other groups, including:

  • Teachers
  • Active military personnel or veterans
  • Firefighters
  • Police
  • Recent college graduates

Who is considered a first-time homebuyer?

Generally, a first-time homebuyer is someone who hasn’t owned a home in the past three years. Other potential first-time homebuyers include:

  • Single parents whose only homeownership has been while married to their former spouses
  • Displaced homemakers whose only homeownership has been through their spouses
  • Individuals who have only owned residences without permanent foundations or properties that don’t adhere to state or local building codes

How to get down payment assistance

Down payment assistance programs can often be found through state and local government websites or HUD’s lists of local homebuying programs and nonprofits.

For example, the California Housing Finance Agency offers the MyHome Assistance Program to eligible first-time homebuyers. Qualifications include living in the home as a primary residence, completing homebuyer education counseling and earning below the income limit.

Down payment assistance in a nutshell

Down payment assistance programs are available at state and local levels. These programs often cover the down payment on a house as well as closing costs. Conventional loans, forgivable loans and grants may be available for eligible borrowers.

If you’re looking to find the right home for your budget, check out this guide on how much house you can afford.

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