Down payment assistance is a form of funding that the Federal, State, or Local governments offer to homebuyers. You are probably thinking about how down payment assistance works. Well, this type of financing option will provide assistance for homebuyers who cannot afford a standard down payment. This assistance option focuses on helping those who need a reduced down payment through different means. Typically, down payments require a large cost that homebuyers need to keep in mind. But, you will find that some of these down payment assistance programs will help ease your mind.
Understanding Down Payment Assistance
You can think of a down payment as a sum of money that you need to pay at the start of the home purchase process. As a homebuyer, a down payment is an important fund to consider when you are buying a house. The amount that the homebuyer provides will go towards the total purchase cost of the house. Additionally, the mortgage will take into account the remaining amount. There are different forms of how a down payment can look like. But, the lump sum can be a challenge for homebuyers to provide. It is important to keep in mind that most of these down payment assistance options help out first-time homebuyers.
Are You a First-Time Homebuyer?
In order for the Program to recognize you as a first-time homebuyer, you must not have owned a home in the previous 3 years. Generally, you should expect that there are strict guidelines to qualify as a first-time homebuyer. If you did not own a house in the past 3 years, then you can qualify as a first-time buyer. It does not matter if you owned a home before the last 3 years. Make sure that you qualify as a first-time homebuyer before you apply for any down payment assistance program.
Why Do Lenders Need a Down Payment?
You might find these extra expenses very challenging, as a homebuyer. But, down payments serve an important role for your lender. Lenders are taking a risk when they offer a loan, so they need some kind of a guarantee. This is where the down payment comes into play. Down payment can decrease financial risk for the lender, because it shows how invested you are. Additionally, it reduces how much you owe the lender. You will find that a down payment increases your chances of a good relationship with your lender.
How Does Down Payment Assistance Operate?
Down payment assistance can come in different forms. This includes grants, loans, and other options. Many different entities provide this type of assistance from a local, state, and federal level. The eligibility requirements you need to meet depend on the program you apply for. There are some assistance options that might require you into fulfill additional requirements, such as a mortgage training process or finances maintenance.
Additionally, how you receive these funds depends on the program that you are applying for. There are some assistance options that base the funds on a percentage of the home’s overall price. Other assistance options limit funds to a specific dollar amount. When you are looking for different down payment assistance programs, you need to review the eligibility requirements of each program.
There are some experts that can be able to provide assistance and give you more information. You can reach out to your local Public Housing Authority (PHA) or with a HUD-approved housing counselor.
Different Types of Down Payment Assistance
You can receive different forms of down payment assistance. This includes the following:
- Forgivable Mortgage Loans
- Deferred-Payment Loans
- Low-Interest Loans
- Matched Savings Programs
Homebuyers find that grants are one of the most beneficial types of down payment assistance. Since you do not need to repay these grants, you might find it beneficial too! You just need to make sure that you apply for down payment assistance grants. These grants will help you pay for a portion of the down payment on your next home. It might seem like free money, and you are right, it is!
Forgivable Mortgage Loans
These loans are a form of second mortgage that will not need for you to pay off while you are in the home for a specific amount of years. Lenders have the possibility of forgiving this type of loan. Additionally, these loans come with a 0% interest rate. Typically, lenders forgive these loans after 5 years. But, you might find that lenders could forgive these loans after 15 or 20 years.
It is important to note that you will need to repay these loans, only in the case that you move away before the forgiveness period expires. As an example, if your lender states that you cannot move until after 5 years and you move after 3 years, then you are responsible for all or some of the forgivable loan.
This loan option is another form of second mortgage and it has a deferred payment plan. With deferred payment loans, you will not need to repay these loans until the following circumstances. This includes moving away, selling the house, refinancing your first loan, or repaying your first loan. It is important to keep in mind that lenders cannot forgive these loans, so you must repay it.
During the final phase of your first mortgage, you might be able to take advantage of a second mortgage as a low-interest loan. You can use the funds from this loan towards the cost of your down payment. But, if you select this loan option, you have to keep in mind that you will have two mortgage payments every month. Typically, homebuyers choose this option when they want to take advantage of the benefits of the low-interest rates, or even no interest rates.
Matched Savings Programs
You can think of these programs as individual development accounts. This is another way for you to manage your down payment expenses. With these programs, homebuyers will deposit funds into an account from several financial institutions. This includes banks, government agencies, community organizations, and more. The financial institution will match the amount that you deposit and the funds can go towards the down payment cost. As an example, if you deposit $3,000 to your account, then the financial institution will match that. This means that you will have a total amount of $6,000 to use for down payment.
Down Payment Assistance Programs
There are several down payment assistance options that you can think of. Some of the options you can think of are:
- Chenoa Fund
- Community Seconds
- Federal Loans (FHA Loans, USDA Loans, VA Loans)
This fund is a nationwide program, with the exception of New York. The CBC Mortgage Agency (CBCMA) offers this affordable housing program up to 3.5% down payment assistance. If the home loan requires a 3.5% down payment (such as an FHA loan), then you will find that this option is particularly useful. However, you will find that there are eligibility requirements that you need to meet. This includes the following:
- You need a minimum FICO credit score of at least 620;
- Your debt-to-income ratio (DTI) must be 45% or less.
Through this fund, you can get a second mortgage without monthly payments or interest rates. Additionally, this program can offer mortgage forgiveness. But, you must make all of your mortgage payments on time for 36 months. You also need to have an income that is 115% less than your area’s median income level. If you have more than 115% of your area’s median income, then you will need to repay the down payment assistance you received.
Community Seconds is a second mortgage that Fannie-Mae approves of, which offers homebuyers the chance to receive funds from different entities. This includes local governments, state governments, and housing non-profit organizations. You can use these funds towards the cost of a down payment, closing costs, or home renovations.
The Federal Government provides a wide range of loan options that allow you to pay a reduced down payment. This might not be the form of down payment assistance you are used to. But, you can still pay less for your down payment! There are three main forms of loans that the Federal Government supports, which are the following:
- FHA Loans
- USDA Loans
- VA Loans
How to Qualify for Down Payment Assistance
As mentioned above, this depends on the type of program you are applying for. Generally, you should have a credit score of at least 620 and meet the income requirements. Additionally, you need to have a valid DTI ratio. There are other factors that play a role in your eligibility. This includes:
- Your home’s location
- Your Status as a Buyer (First-Time Buyer)
- Whether You Have Mortgage Training or Not
- Your Duration in the Home in Years
In conclusion, you should seriously consider down payment assistance options. If you want help with down payment on your next home, then you can think about these financing options. You will find that it will significantly help you in many ways and the down payment will go towards the purchase price of the house.