A guide to down payment assistance programs – Forbes Advisor
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You probably think you must have a big advance payment put in the bank to buy a house. This isn’t necessarily true, as there are literally thousands of programs out there that will help you put down a down payment so you can get your dream home.
Down payment assistance programs are initiatives sponsored by federal, state, and local governments, as well as private, not-for-profit organizations. They offer loans including interest free loans and even forgivable loans. These groups also offer grants to prospective homeowners who need a little help.
These programs are not for everyone. If you can’t get pre-approved for a mortgage, you probably cannot take advantage of a down payment assistance program. You will need a stable job, a good income and an above average credit score to be eligible for a mortgage. But if the only thing stopping you from buying a home is the down payment, you may be able to overcome that with a down payment assistance loan.
Who needs help with the down payment?
Many future homeowners find themselves strapped for cash for a down payment. Sixty-eight percent of renters said saving for a down payment prevented them from accessing the property, according to a Urban Institute report on barriers to home ownership.
But while you will probably need a little cash up front, you might not need as much as you think. A conventional mortgage requires deposit as low as 3%, but you will need to pay mortgage insurance. Some government guaranteed mortgages, such as a USDA loan– cannot require any deposit.
Still, the national median price of single-family homes hit $ 313,000 in February 2021, according to the National Association of Realtors. A 3% down payment on a home at this price would be $ 9,390, still out of reach for some borrowers.
How down payment assistance programs can help
Enter down payment assistance programs. These programs offer to help buyers pay some or all of the down payment and, in some cases, closing costs.
There are three main types of down payment assistance, including:
- Interest-bearing loans, formed as a second mortgage, which the qualified buyer must repay.
- Interest-free loans, which must be repaid, but at no additional cost to the buyer.
- Subsidies, which are funds that the buyer does not have to repay.
One type of hybrid aid is a forgivable loan. These loans do not have to be repaid if the borrower occupies the home for a while. Loans are often in the usual 30-year fixed rate format and charge approximately market interest rates.
There is often a limit to the amount of down payment assistance you can receive. For example, a borrower can only get up to 5% of the price of the house through the assistance program. Sometimes the amount is a fixed amount. The Urban Institute’s survey of the down payment assistance landscape indicated that eligible borrowers could typically benefit from $ 2,000 to $ 39,000.
Down payment assistance often does not cover the entire down payment required. The borrower may need to be able to find money to invest in the transaction.
How to find down payment assistance programs
There are over 2,500 down payment assistance programs, most at state and local levels, in addition to major federal initiatives like Home Loan by Fannie Mae. In total, more than 1,300 cities, counties, states and other agencies offer down payment assistance.
Given this variety, the eligibility requirements vary, although there are some commonalities. For example, low-income first-time buyers are the most likely to be accepted. And there can be as many preferences as restrictions.
For example, HomeReady targets low-income homebuyers with credit scores above 620, but will serve either first-time homebuyers or regular homebuyers. You may be able to use the assistance for a purchase loan or mortgage refinance. There are many programs in place to give preference to veterans or serving members of the military or first responders such as police and firefighters. Others target educators or health workers.
There are several ways to identify down payment assistance programs near you:
- Interview mortgage lenders. Find three or more that say they participate in at least one down payment assistance program. They will be able to discuss the eligibility and conditions of the program.
- Do some research online. the US Department of Housing and Urban Development (HUD) has an online index of state housing programs that includes local down payment assistance programs.
- Take a training course for home buyers. As part of the course, which you may need to take to qualify for assistance, you will learn about down payment assistance options. You can find education programs for home buyers by looking at HUD’s index of state and local housing programs. Not all education programs for home buyers will be accepted by all down payment assistance programs, so it makes sense to select one that is offered or approved by the down payment assistance program. down payment you want to use.
How to know if you are eligible for down payment assistance
Only certain home buyers are eligible for down payment assistance. Eligibility varies by program, but requirements typically cover income, home price, creditworthiness, employment, and an acceptable debt-to-income ratio. These are the same requirements that a mortgage lender will look for when deciding whether or not to extend a loan offer. Basically, if you can get a mortgage pre-approval letter but don’t have a down payment, you can probably apply for one of these programs.
Program administrators will review:
- Returned. You usually don’t want to make too much money. Depending on the program, your income may need to be less than 80% of the local median income. Some programs have more liberal standards of 120% or more of the local median income.
- Solvency. Programs often require homebuyers to have a minimum credit score. The most common benchmark is a score of 620 to 640 or higher. Some have minimums ranging from 660 to 680.
- Debt-to-income ratio. Not all programs place restrictions on the buyer debt to income ratio, which is the percentage of monthly debt payments expressed as a percentage of monthly income. Of those who do, 43% is the typical maximum debt-to-income ratio. This is similar to the ratio that a mortgage lender will need.
- House price. Many programs will only help buyers who have their eye on a home that is selling for around the median local price, or a little higher.
- Occupation. You will likely have to promise to live in the house for a few years to several years. Loans to non-occupiers are riskier, so lenders want to make sure they are pricing the loan correctly. However, intention is the key. If something happens after a year and you need to move, you won’t be required to notify the lender. In addition, you can get down payment assistance for small multi-family properties of up to four units if you plan to occupy one of the residential units.
- Previous home ownership. Most of these programs are limited to first time buyers. However, they often define the term loosely. Even if you have previously owned a home, you may be able to regain first-time home ownership status several years after your last possession.
- Education. Often, the programs require first-time homebuyers to take homebuyer training courses. In Texas, for example, the Ministry of Housing and Community Affairs has a state sponsored course. The free two-hour online course guides a potential buyer through the process and issues a certificate of completion. Many home buying assistance programs require first-time homebuyers to have similar certificates.
It is important to remember that there are many independently run programs with a wide variety of requirements and features. If you don’t qualify for one, you may well qualify for another.
Down payment assistance during the pandemic
Covid-19 had little effect on down payment assistance programs. The vast majority of the thousands of programs operate more or less normally. One difference is that the education of home buyers these days is likely to be virtual rather than in a classroom setting.
Note that some down payment assistance programs include unemployment protection that will help you pay off your mortgage if you lose your job due to Covid-19 or some other cause. And be aware that since many of these are government programs, they tend to exhibit some seasonality. They may have more funds soon after the start of the fiscal year in the fall than in the spring and summer, when they have spent their year’s allowances.
Down payment assistance programs are widely available and are easier to qualify than you might think. For a significant number of people who have good jobs, a stable income, and decent credit, but lack the cash for a down payment, they provide a viable path to homeownership.