Down Payment Assistance Programs: What They Are and How To Get Them
Down payment assistance programs can be a useful tool for prospective homeowners struggling to save cash. The programs are available through federal, state or local government housing agencies or nonprofits homeownership centers.
Read the fine print though: Down payment assistance programs come with extra restrictions, like income limits and residency requirements, that you’ll need to meet in order to qualify.
What is down payment assistance?
Down payment assistance (DPA) is a grant, loan or tax credit that helps eligible homebuyers cover the cost of their down payment. Down payment assistance programs are usually funded by federal and state housing agencies, banks and neighborhood nonprofit housing authorities.
Although it’s called down payment assistance, many programs allow homebuyers to use DPA funds for closing costs, too. Others offer tax incentive options such as mortgage credit certificates that homebuyers can use to qualify for a larger house or a bigger tax refund.
Use our mortgage calculator to help you decide how much to put down toward your home purchase.
How to qualify for down payment assistance
To qualify for down payment assistance, you have to meet the minimum mortgage requirements for a regular mortgage. Your income, employment history, credit scores and credit history must show you can repay the loan. To ensure DPA programs aren’t misused by investors or high-income borrowers who want to avoid a down payment, certain restrictions apply:
You can’t exceed income caps
DPA programs are meant to help borrowers with modest incomes purchase homes. Income limits are often based on your area’s median income, but each program has its own unique requirements.
You’ll have higher minimum credit score requirements
You may need a score of 640 or higher to qualify for DPA programs. That’s significantly higher than the 580 FHA or 620 conventional credit score minimum for non-DPA loans
Learn more about how to improve your credit score.
You’ll have lower debt-to-income ratio limits
Lenders consider how much debt you carry compared to your income when they calculate your debt-to-income (DTI) ratio. To offset the risk of approving a mortgage with no down payment, DPA programs often limit your DTI ratio to 45%. Standard down payment loans, however, allow for a DTI of 50%.
You’ll face neighborhood and price restrictions
FHA down payment assistance is usually meant to help revitalize specific communities and improve the quality of life for nearby residents. Some programs also set purchase price limits depending on the county you’re buying in.
You can’t already own another home in many cases
The U.S. Department of Housing and Urban Development (HUD) first-time homebuyer programs are typically for buyers who haven’t owned a home in the last three years. Exceptions may be possible if you’re a repeat buyer searching in designated counties or neighborhoods.
You must own the home for a certain number of years
DPA programs are designed to promote homeownership, therefore borrowers must own the property for a certain number of years. If you move before then, you’ll have to repay the assistance. The repayment amount depends on how much aid you receive and how long you live in the home.
You must occupy the home
To prevent buy and flip investors from using down payment assistance, DPA programs are restricted to buyers who plan to live in the homes. Homeowners may be subject to tax penalties if they convert a home purchased with down payment assistance into a rental unit.
You may need homeownership counseling
Some programs require homeownership counseling before applying for a loan to educate buyers about the responsibilities and costs of homeownership. Check the HUD website to find a counseling agency near you.
How do down payment assistance programs work?
You can find down payment assistance programs for your state through the HUD website. The process for getting down payment assistance varies depending on the program you apply for. However, you’ll need to go through the mortgage process regardless of which DPA program you choose. That means you’ll need:
Credit scores that meet the loan guidelines
Satisfactory income and employment history
Total debt ratios below the program’s maximum
An appraisal to verify the value of the home
Full approval for your mortgage before you receive the down payment assistance
Types of down payment assistance
Most DPA programs come in three forms: grants, second loans and tax credits.
Down payment assistance grants
A grant is a lump sum of money that consumers can use to buy a home. In most cases, the funds do not need to be repaid.
Four rules you should know about DPA grants
- They won’t cover the full cost of a house.
- You must use the grant toward the down payment requirement on a traditional mortgage.
- Completion of a homeownership class before closing is generally mandatory.
- You may have to repay a portion of the grant if you sell or refinance your home within a specific time period.
Down payment assistance loans
DPA loans work like second mortgages: You receive the funds all at once, and a lien is recorded on your home. If the loan requires a payment, you’ll pay it along with your primary mortgage payment each month. However, many programs don’t require you to make any payments at all, and many are fully “forgivable” as long as you stay in your home for a set time.
Mortgage credit certificate
A mortgage credit certificate (MCC) gives homeowners an income tax credit worth up to $2,000 of mortgage interest. Unlike a deduction, you get a dollar-for-dollar credit toward your federal income tax bill.
You can use the reduction to qualify for a larger house, reduce your paycheck withholding to boost your take-home pay or get some extra cash from your tax refund. Like other DPA options, income limits apply, you must be approved for a first mortgage and plan to live in the home as your primary residence for a set number of years.
→ One drawback: You’ll pay MCC program fees that vary by state and may include upfront and ongoing charges.
Where do I find down payment assistance programs to buy a home?
Lenders often advertise first-time homebuyer programs on their websites. However, there are other places that will help you find the right DPA program:
- HUD’s homebuying programs website. Check HUD’s homebuying programs site for a state-by-state breakdown of programs offered countrywide.
- State and local housing finance agencies. Besides federal funding, state and local governments may sell tax-exempt bonds to provide down payment assistance. These programs are marketed heavily by real estate agents and mortgage companies, so apply soon or the funds may run out.
- Employers. Large companies may offer down payment assistance to help recruit or keep employees in a particular area.
- Industry-specific programs. Employees in specific professions, such as law enforcement, the military, education and health care may qualify for DPA programs geared specifically toward them. Some options include:
- Good Neighbor Next Door. Law enforcement officers, K-12 teachers, firefighters and emergency medical professionals can buy homes at up to a 50% discount under this program. The catch: Buyers must live in the home for at least 36 months to avoid having to pay the assistance back.
- Teacher Next Door. Educators can get up to an $8,000 grant or down payment assistance of up to $10,681. Most closing costs are covered for eligible buyers.
- Nurse Next Door. Medical staff, nurses and health care support employees may be eligible for grants and DPA at terms similar to the Teacher Next Door program.
- Nonprofit housing agencies. Habitat for Humanity and NeighborWorks are examples of nonprofits that provide assistance money. They generally assist low- to moderate-income families trying to buy their first home.
- First mortgage programs through banks. You must choose a bank approved by your state’s housing finance agency for your first mortgage. Not all lenders are DPA-approved. Ask your lender if they participate in down payment assistance programs before you get preapproved.