Not everyone has the funds saved to make a big enough down payment on a home. If you’re a first-time home buyer, the good news is that you may qualify for down payment assistance through state or local programs.
There are many pros and cons of down payment assistance, but these programs can help put homebuying within reach for those who qualify.
Here’s what you need to know about down payment assistance and how it can help make homeownership possible.
What Is Down Payment Assistance and How Does it Work?
Buying a home typically requires homebuyers to make a down payment, which is part of a home’s purchase price that you pay upfront. Down payment assistance, which is generally reserved for first-time homebuyers, is any program or funding that helps buyers reduce the amount they need to save to make a down payment.
Down payment assistance programs are offered nationwide by state, county, and city governments, non-profit organizations, or directly through the lender. Depending on the down payment assistance (DPA) program, you could receive a grant or low-interest loan to use towards your down payment. Some DPA programs allow buyers to use funds towards closing costs as well.
Common types of down payment assistance include:
- Grants: gifted money that can be used toward a down payment. Grants do not need to be repaid. However, some programs may use the term “grant” but come with repayment requirements.
- Low-interest loans: this is repaid along with your regular mortgage payment over a set period of time.
- Deferred loans: these loans usually don’t charge interest and don’t need to be repaid until you sell, refinance, or the mortgage reaches the end of its term.
- Forgivable loans: forgivable loans expire after a certain period of time, meaning they don’t need to be paid back. However, this is only true if you own the home and make timely mortgage payments.
Who Is Eligible for Down Payment Assistance?
Down payment assistance is generally only available to first-time home buyers; however, being a first-time home buyer doesn’t necessarily mean it’s your first home purchase. You can still qualify as a first-time home buyer if you haven’t owned a principal residence for a three-year period that ends on the date of a new home purchase.
Qualification may also depend on your household’s income and your credit history. The purchase price of the property and its location may also be considered for certain down payment assistance programs.
It’s important to remember that each down payment assistance program is different. Be sure to check your specific program’s details if you’re unsure about eligibility.
If you’re ready to become a homeowner, check out Total Mortgage’s list of loan products. You can apply for a loan online and get a free quote in minutes.
How Long Does It Take To Get Down Payment Assistance?
The amount of time it takes to get down payment assistance depends on the program. Every program has its own process, so speed will vary.
Don’t be surprised if it takes longer to close on your mortgage. Because these programs must work with your lender, down payment assistance could also affect your closing timeline.
Pros and Cons of Down Payment Assistance
It’s important to weigh the pros and cons of down payment assistance before deciding if it’s right for you. Here are some key points to keep in mind.
Pros of Down Payment Assistance
- You can buy a home sooner. For conventional loans, you can make a down payment as low as 3 percent. But on a $300,000 mortgage, this is the equivalent of $9,000. Without down payment assistance, it could take months or years before you’re able to save enough for a down payment.
- You may be able to avoid private mortgage insurance (PMI). If a down payment assistance program gives you enough to put down 20 percent on a home, you could potentially avoid paying PMI over the life of the loan.
- You may qualify for more favorable mortgage terms. A larger down payment lowers your loan-to-value (LTV) ratio. By lowering your risk level, you could be offered a better interest rate on your mortgage.
- You can keep more money in your pocket after closing. By using down payment assistance, you can save more money upfront instead of putting all of your savings into your down payment.
Cons of Down Payment Assistance
- It could cost you more over time. If you use an interest-bearing loan, you could spend more paying it off than you would have if you didn’t use down payment assistance.
- You could overextend yourself. Down payment assistance may allow you to purchase a more expensive home, but it could add financial stress down the road.
- Closing could take longer. Down payment assistance adds an extra step to the mortgage process. This could push the closing date further out than it would have been without assistance.
- The program may require you to live in the home for a certain number of years. To have some types of assistance forgiven, you may be required to occupy the home for a certain length of time.
Do You Need to Pay Back Down Payment Assistance?
Down payment assistance isn’t always free money. Whether or not you need to pay back down payment assistance depends on the program. Each program has different terms, so it’s important to pay attention to the details.
Low-interest loans and deferred loans typically need to be repaid, but grants and forgivable loans may not need to be paid back. However, you may be required to meet certain conditions in order for the loan to be forgivable.
How Much Do You Get for Down Payment Assistance?
The amount you get for down payment assistance depends on the program. Some may offer a flat dollar amount while others may offer a percentage of the home’s purchase price.
For example, MassHousing covers 10 percent of a home’s purchase price up to $50,000 in down payment assistance if you purchase a home in select communities or up to $30,000 elsewhere in the state. Meanwhile, the Connecticut Housing Finance Authority (CHFA) offers a down payment assistance loan of up to $20,000.
Need Home Financing? Consider Total Mortgage
Down payment assistance isn’t for everyone. There are plenty of pros and cons of down payment assistance and each program comes with its own set of eligibility requirements. Make sure to consider all of your options and the long-term consequences of accepting assistance.
Looking for the right mortgage product? At Total Mortgage, we have mortgage experts across the country to help you with your home-buying needs. Find a Total Mortgage office in your area today to explore your options.
Source: totalmortgage.com