Your Down Payment Assistance Guide

Down payment assistance refers to funds made available to homebuyers through federal, state, or local programs. “How does down payment assistance work?” you might wonder. Well, depending on the program, this assistance option helps people receive the financial support they need to afford a lower down payment in a variety of ways.

Homebuyers need to budget for down payments, which can be substantial. However, with some of these programs, it does not have to be a major source of concern.

What is a Down Payment?

A downpayment is a sum of money that a homebuyer pays at the beginning of the process of purchasing a home. This amount of money is a part of the total price of the house. While the process goes on, the mortgage covers the remaining balance.

A down payment can take several forms, but it is sometimes difficult for homebuyers to come up with this big money. It is important to keep in mind that most down payment aid programs are only available to first-time home buyers.

When it comes to who qualifies as a first-time homebuyer, you may expect to see strict standards. If you have not owned a house in the last three years, you will most likely be classified as a first-time buyer (even if you owned a home before the last 3 years).

Why are Down Payments Necessary?

As a homebuyer, it’s normal to hate the extra costs you will have to pay. Down payments, on the other hand, are quite beneficial to your lender. When you take out a loan, lenders take a risk. Down payments demonstrate your investment in the property and minimize the amount you owe to the lender, making you a less risky borrower to the lender.

Moreover, the down payment can help you buy a home in a better area and increase the size of the house you can afford. Essentially, it gives you more options because you would still qualify for the same amount of mortgage. In other words, the down payment is simply extra cash that can help you buy more.

How Does Down Payment Assistance Work?

Grants, loans, and other programs are all good ways to help you with the down payment. This type of assistance is available from a variety of organizations at the local, state, and federal levels.

The eligibility standards for each program are different. Some assistance programs may require the homebuyer to meet additional requirements, such as completing a mortgage training course or maintaining their finances.

The manner in which you will receive the funding also differs depending on the program. Some assistance is based on a percentage of the home’s sale price, while others are limited to a set amount of money, and so on. When comparing different down payment aid programs, make sure you look at the criteria for each one.

There are lots of professionals that are ready to help you with the information you need. You can contact your local public housing authority (PHA) or a HUD-approved housing counselor for assistance.

Common Types of Down Payment Assistance

You can expect to receive down payment assistance in the following forms:

  • Grants
  • Forgivable Loans
  • Low-Interest Loans
  • Deferred-Payment Loans

Grants

Because it does not have to be repaid, this is one of the most popular types of down payment assistance among homebuyers. That is correct, there are grants available to homebuyers that are literally free money.

Forgivable Loans

These loans are a form of a second mortgage that does not require repayment as long as the homebuyer stays in the house for a set period of time. Not only can the loans be forgiven, but they also have a 0% interest rate. Lenders usually cancel these loans after 5 years, however, some may require more time, such as 15 or even 20.

It is noteworthy that if the homebuyer moves before the forgiveness term ends, these loans will have to be returned. For example, if your lender mentioned that you could not move until after at least 5 years, but you move after only 3, you may be responsible for the entire forgivable loan.

Low-Interest Loans

You may be able to take advantage of a second mortgage in the form of a low-interest loan while your first mortgage is being finalized. This loan’s funds cover the cost of your down payment. You will, however, have two monthly mortgage payments if you choose this lending option. When homebuyers want to take advantage of low loan rates, they usually choose this option (or no interest rates).

Deferred-Payment Loans

This loan is a deferred payment option that is similar to a second mortgage. This means that the homebuyer will not be responsible for the repayment of these loans until they relocate, sell, refinance, or pay off their original loan. It is important to understand that these loans are not forgiven and must be paid back.

Down Payment Assistance Programs

Chenoa Fund

Except for New York State, this program is essentially available statewide. CBC Mortgage Agency is the provider of this low-cost housing program (CBCMA). The Chenoa Fund can help with a down payment of up to 3.5%. This is especially useful if your home financing only demands a 3.5 percent down payment (like with an FHA loan).

The recipient must have a FICO® credit score of at least 620 and a debt-to-income ratio (DTI) of no more than 45%. You will get a second mortgage with no monthly payment and no interest rate from this fund.

If the beneficiary makes their mortgage payment on time for 36 months and has an income that is 115% less than the median income in their area, they may be eligible for mortgage forgiveness through this program. If the homebuyer earns more than 115% of the typical income in their area, they will be required to reimburse the down payment assistance.

Community Seconds Mortgage

A Community Seconds mortgage (also known as Freddie Mac’s Affordable Seconds) is a type of down payment assistance program offered by Fannie Mae that allows approved third parties to lend money for a down payment or closing costs.

A second mortgage secures the loan and it is always subordinate to the first. This mortgage helps homebuyers receive money from local governments, state governments, and non-profit housing organizations.

Federal Loans

The government offers a number of loan solutions that allow homebuyers to pay less for a down payment. While this is not technically a kind of down payment assistance, it does allow homebuyers to spend less for their down payments. The following are the three primary categories of government-backed loans:

  1. Federal Housing Administration (FHA) Loans
  2. United States Department of Agriculture (USDA) Loans
  3. The Department of Veterans Affairs (VA) Loans

FHA Loans

The Federal Housing Administration FHA (which is a division of the United States Department of Housing and Urban Development [HUD]) backs this loan. If you have a credit score of at least 580, FHA loans allow you to buy a home with just a 3.5% down payment. If your credit score is below 580 but above 500, you will only be required to pay 10% for a down payment.

USDA Loans

This type of loan may be helpful to anyone looking to buy a home in the suburbs or in rural areas. To be eligible, a homebuyer must live in an area designated by the USDA as rural enough, as well as meet certain income requirements. The recipients of this loan have the opportunity of purchasing a home without a down payment.

VA Loans

This type of loan is dedicated to active service members, veterans, and some spouses of service members who have passed away. With these loans, recipients do not have to pay a down payment at all.

Who is Eligible for Down Payment Assistance?

The majority of down payment aid programs are designed for first-time home buyers.  A repeat home buyer, on the other hand, is often considered a “first-time buyer” if they have not owned a property in the previous three years.

It varies from one program to another, but income level, purchase price limits, and purchasing a property in a suitable region are all possible requirements. Many programs also demand that you take homebuyer education classes. The exact requirements for eligibility will vary depending on where you live and the programs that are available. However, many of them follow the same rules.

How to Apply for Down Payment Assistance?

You will need to look into the programs available in your area. The HUD website has a number of resources that can be a good place to start. On their website, you can search for available opportunities by state. You can also contact your city or county to learn more about local programs and the application process.

Bottom Line

One of the most difficult challenges to homeownership is saving for a down payment. Between expenses, debt, and living a normal life, it can be difficult to put up a 20% down payment.

Fortunately, there are several types of down payment assistance solutions that allow eligible prospective home buyers to borrow their down payment as a second mortgage on their home. So, having a house of your own is no more a dream.

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