Down Payment Assistance: What It Is And How To Get It

Homeownership is traditionally considered a huge part of the American dream. But two of the big things keeping people from making the transition from dreamers to homeowners are the down payment and closing costs associated with a mortgage loan. Down payment assistance can help you make your wish a reality faster.

What Are Down Payment Assistance Programs?

First, let's start this part of your home buyer education with the definition of a down payment. This refers to the lump sum of money you pay when the sales transaction is processed. The amount of your down payment is a percentage of your home’s purchase price and reduces the amount that you’ll need to borrow from your mortgage lender.

For example, if you are purchasing a $250,000 home and your down payment is 20% (to avoid private mortgage insurance for a conventional loan), that would be $50,000. The remainder of the purchase price would be covered with your loan, which would be $200,000. Does that seem like too much to put down? Fear not, loans come in many shapes and sizes, with a variety of percentages of the purchase price available, including 0% down payments for some qualified home buyers.

Down payment assistance programs aim to put money toward the down payment and/or closing costs of buying a home in order to help remove an obstacle to homeownership. Often times, these programs are geared toward first-time home buyers, though that’s not always the case.

As you can imagine, many home buyers, particularly first-timers, need financial assistance to make their dream of home ownership a reality. Down payment assistance could prevent you from having to dip too deep into your savings, allowing you to have more money available for closing costs and other expenses like home improvements, home maintenance and much more.

How Down Payment Assistance Programs Work

Some down payment assistance only applies to certain types of mortgage loans. The ones that commonly allow all types of assistance are Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans, United States Department of Agriculture (USDA) loans and conventional mortgages. Rocket Mortgage^® doesn’t do USDA loans at this time.

It’s also good to know what to expect from mortgage lenders as you apply for down payment assistance. You want to have these types of conversations because lenders may have restrictions around the type of assistance they accept.

Our friends at Rocket Mortgage accept various types of down payment assistance including grants and loans. However, they don’t take assistance that involves becoming an approved lender. Additionally, assistance requiring the lender to give up the primary lien position isn’t accepted. Knowing the types of assistance your lender will accept will save you time by narrowing your search.

A good place to start would be a conversation about where to find and research these types of loans, which can be at the city, county, state or national level. Your lender should be able to spell everything out for you in terms of what is available, but doing your own research on the types of down payment assistance and how they work is always a good idea.

Who Is Eligible For Down Payment Assistance?

Every down payment assistance program has its own eligibility requirements, but here are a few of the most common:

• Sometimes the programs specify that you have to be a first-time home buyer. Unless otherwise stated in the eligibility terms, this may actually be more flexible than you think. The typical definition of first-time home buyer is anyone who hasn’t owned any type of residential property alone or jointly in the last 3 years. If a client is a displaced homemaker or single parent, the 3-year waiting period may be waived if they only owned a primary residence jointly with their former spouse.
• The location of the home may matter, particularly if you’re working with a local or state housing authority.
• You may have to take a homeownership education or counseling course.
• Some assistance programs have a requirement that you have to be at or below a certain income level.

It’s common to have to occupy the property as a primary residence for a specified period of time.

Which Loans Are Eligible For Down Payment Assistance?

Down payment assistance of some sort is likely eligible to be used on most types of home loans. It’s just that not every type of assistance is eligible for every loan. This may also vary based on the policies of the lender. We’ll refer to the policies of Rocket Mortgage.

Grants and second-lien loans are typically eligible on conventional, FHA and VA loans. Jumbo Smart loans are eligible for grant assistance.

How Much Can You Get From Down Payment Assistance?

Every program is different, so there’s no specific amount that you’re guaranteed to get from down payment assistance. It’s also important to note that the way the funding is structured may be different from program to program. Some programs are structured to give flat amounts of money. Others give a percentage of the loan amount up to a maximum.

Types Of Down Payment Assistance Programs Available

Down payment assistance often comes in one of several available forms that each have their benefits and downsides.

Housing Grants

Housing grants are likely the most sought-after form of down payment assistance. That’s because grants are free money with no conditions under which you have to pay them back. These are often funded by federal, state and local governments or nonprofits.

Typically, grants are available for first-time home buyers or low-income families. But they may be available for a variety of demographic groups and/or social or professional affiliations.

Deferred-Payment Loans

Deferred-payment loans have repayment terms that don’t start right away. Instead, you might not have to make payments for the first several years you’re in your home. In some cases, the payment on your loan may not be due at all until you move out, refinance or otherwise pay off your home. In that case, the full amount is due at the payoff.

Forgivable Loans

Forgivable loans are those that have a balance which is set aside if you meet certain conditions. In other words, if you do everything asked of you under the terms of the loan, you don’t have to pay it back. For example, the home as your primary residence for a given period. Where employers are offering assistance, it may be forgiven if you work there for a number of years.

While these loans have an interest rate and a repayment term, if the balance is forgiven, you don’t have to worry about it.

Low-Interest Loans

A low-interest-rate loan includes fixed amounts for payment each month with a defined payoff timeline. They usually include a fixed interest rate as well. Low-interest-rate loans are among the most competitive to qualify for, which means you will pay less over the life of the loan, but it may be a bit harder to get approved for than some other types of loans.

How To Get Down Payment Assistance

To qualify for down payment assistance, there are several steps you can take to set yourself up for success:

1. Reach out to your lender: If you do this upfront before applying for anything, it will keep you from wasting your time on programs your lender can’t accept. Additionally, they may be able to help point you to programs in your area that you might qualify for based on what they know about your application.
2. Research programs in your area: This will allow you to figure out the programs you might qualify for. As an example, you might look at local housing authorities, housing nonprofits, religious groups or other special-interest groups with whom you belong or meet criteria. Additionally, the Department of Housing and Urban Development keeps a local assistance directory.
3. Check your eligibility: The down payment assistance provider should make their qualification requirements available. Verify your eligibility and begin to gather any documentation you may need to show during the application process.
4. Apply: Once you’re ready, it’s just a matter of applying with the provider and waiting on their decision. There will likely be some paperwork. If there is an income component to qualification, you should be prepared to share things like W-2s and tax returns. The good news is you’ll likely have this already for mortgage qualification.

The Bottom Line

Down payment assistance programs help with the upfront costs of buying a home including the down payment and/or closing costs. They can be used across many loans and come in flat amounts or a percentage of the loan amount.

Many programs are targeted at first-time home buyers, but there are also those targeted at people who make under a certain income or groups who share a religion or disability. They can be grants, but assistance can also come in the form of deferred-payment, forgivable or low-interest loans. In order to apply, you should research programs that may be available to you, be aware of what lenders will accept and ready the appropriate materials.

Now that you know all the ins and outs of down payment assistance, you can apply for a mortgage online. You can also feel free to give Rocket Mortgage a call at (833) 326-6020.