Weighing The Pros And Cons Of Down Payment Assistance

You’ve crunched the numbers. Your budget can easily sustain a monthly mortgage payment. Including taxes and insurance, no problem. But your mortgage down payment? That’s  another story, requiring diligent savings, potentially for many years. Down payment assistance (DPA) can help with that. It can also present its own challenges. Let’s discuss the pros and cons of down payment assistance.

How Down Payment Assistance Programs Work

Down payment assistance programs are intended to help borrowers afford the down payment and closing costs associated with getting a mortgage. You often qualify for them using similar criteria that would be used to qualify for a mortgage. The provider may ask for documentation regarding your income and assets. Sometimes they check your credit score.

Some DPA programs are meant to serve specific groups, such as such as low- to moderate-income individuals below certain wage thresholds. Others are aimed at first-time home buyers.

While programs may have their own definitions, a first-time home buyer is one who hasn’t owned any real estate in the 3 years leading up to their closing date. They may also qualify without a waiting period if they’re a single parent or displaced homemaker who previously owned jointly with a spouse.

If your DPA provider chooses to follow FHA first-time home buyer guidelines, you may also be considered qualified if you’ve only lived in a primary residence not affixed to a permanent foundation. Finally, you may qualify if your previous residence didn’t meet building codes and it was cheaper to buy a new home than fix it.

Before we break down the types of down payment assistance that are out there, you should be aware that not every lender accepts all forms of DPA and not from all sources.

For example, our friends at Rocket Mortgage^®, along with many other lenders, don’t accept assistance requiring the lender to be approved by the provider. Matched savings programs aren’t accepted either. Additionally, programs from housing finance authorities (HFAs) aren’t accepted by many because they often have restrictions on the lien.

With that out of the way, here’s a list of the common forms of down payment assistance:

• Down payment grants: Grants are often considered the most desirable form of DPA because there’s no requirement that they be paid back. It’s money without conditions.
• Down payment deferred loan: A deferred loan is one that doesn’t have to be paid back right away. There are two common ways of going about this. In the first, monthly payments are delayed for a specified number of years at the beginning of the loan. Alternatively, the loan may not be due until the house is refinanced, sold or the loan is otherwise paid off.
• Forgivable down payment loan: A forgivable down payment loan is one that doesn’t have to be paid back if certain conditions are met. For example, you might have to use the house as your primary residence for a given period. In other cases, an employer might offer this assistance if you agree to work for them for a number of years following the loan.
• Low-interest loans: You might get a loan from a bank or other lender to cover your down payment. If you do this, it’s just important to note that the monthly payment is included in your debt-to-income ratio.
• Lender programs: Lenders often offer their own form of down payment assistance through special loan options. As an example, for those who qualify below certain income thresholds, Rocket Mortgage offers ONE+.¹ This allows a client to put 1% down while receiving a 2% grant from Rocket Mortgage.
• Individual Development Accounts (IDAs): Individual Development Accounts are matched savings programs set up by states with participating financial institutions where funds are matched up to a given amount for one of several beneficial goals, including achieving independence through homeownership. This assistance is typically targeted at low-income individuals.
• Matched Savings Programs: These are similar in structure to IDAs, but they aren’t government-supported. Financial institutions might offer these to incentivize clients to open accounts.

Pros Of Down Payment Assistance Programs

There are several advantages of utilizing down payment assistance. Here’s a summary of the top benefits.

Easier To Afford A Home

Down payment assistance makes it easier to afford a home without having to delay plans for years while you save up for the upfront investment. This could mean getting out of renting and into a situation with a more stable payment and permanent housing much sooner.

May Avoid Private Mortgage Insurance

If you’re getting a conventional loan and make a down payment of less than 20%, you typically have to pay private mortgage insurance (PMI). If you opt for a borrower-paid PMI option, it typically comes off once you reach 20% equity, or you can have your lender pay for it in exchange for a slightly higher rate, but it’s better to avoid it altogether.

If down payment assistance means the difference between getting to a 20% down payment and not, that could save you significant money over the life of the loan.

More Favorable Mortgage Terms

In addition to how you plan to occupy the property and your credit score, your down payment is one of the biggest factors in your personal financial characteristics that determine the interest rate you receive. Generally speaking, the higher your down payment, the better your rate. There’s less risk for the lender.

Cons Of Down Payment Assistance Programs

Down payment assistance can be a big help, but that doesn’t mean there aren’t some potential drawbacks.

May Not Be Accepted

It’s important when you start looking around for down payment assistance options that you understand the type of assistance your preferred lender will and won’t accept. It’s common for lenders not to accept every type of program. Moreover, if you go with an option from a state housing finance authority, you may have to work with one of their approved lenders.

May Cost More Over Time

If your DPA came in the form of a loan that has to be paid back, this could mean that your loan costs more over time if we include that in the cost of your overall mortgage financing. It may be a trade-off worth making still, but it’s something to think about.

May Cause Longer Closing Process

As we briefly mentioned earlier, qualifying for down payment assistance is quite a bit like applying for a mortgage at times. You may have to share income and asset information and go through a credit check. Requirements are going to vary by the provider. There’s a chance it could lead to a lengthier closing process.

However, you can minimize these delays in the same way you would for your mortgage process. If you promptly respond to all requests for information and documentation, it can help speed things up.

May Have Residency Restrictions

Some DPA programs have very specific residency restrictions. The most common clause is that you have to use the home as your primary residence for a given time period. However, if you get your assistance from a state or local housing finance authority or a municipality, there are probably also rules about living within that territory.

Alternatives To Down Payment Assistance Programs

If you don’t qualify for down payment assistance or you decide it isn’t right for you, there are alternatives. Here are a few:

• Receiving cash gifts from friends and family: Cash gifts from friends and family don’t need to be paid back. It’s just important to be in communication with your lender because they’ll want a gift letter stating that no repayment is expected. Most of the time, the gift has to come from a family member, but FHA guidelines allow for gifts from close friends as well.
• Selling valuable assets: Another thing you can take a look at if you’re short on funds for a down payment is things like selling extra cars or other valuables you might have. You can also liquidate stocks and bonds.
• Setting a savings plan: It’s also not a bad idea to set up a savings plan in general. You can cut down on discretionary spending as much as you’re willing to while looking toward the goal of saving for a house. You could even set up an account and start making automatic deposits every paycheck so you don’t even have to think about it.

FAQs On Down Payment Assistance Programs

Now that we’ve gone over the broad strokes of the benefits and disadvantages of down payment assistance programs, let’s touch on some of the most frequent questions you might have.

How long does it take to get down payment assistance?

This is a difficult question to answer because it’s going to depend on the process of the provider as well as how quickly you can get documentation and information back to them. To help avoid undue delay, make sure to respond to requests as soon as possible.

Who is eligible for down payment assistance?

This depends heavily on the program you’re applying for. Some are aimed at low- to moderate-income borrowers. Others serve first-time home buyers. Then there are those that are aimed at other cohorts.

Do you have to pay back down payment assistance?

If it’s a grant, the down payment assistance doesn’t have to be paid back. DPA that can be forgiven usually doesn’t have to be paid back, assuming you meet the conditions. The only assistance that has to be paid back for sure comes in the form of loans.

Can you use down payment assistance from multiple providers?

The answer to this is generally yes, as long as the assistance that you’re getting doesn’t prohibit multiple sources of DPA.

Is down payment assistance worth it?

Grants are pretty much always worth it because it’s free money. If the down payment assistance comes in the form of a forgivable loan, one that’s deferred or requires immediate repayment, it’s important to understand and evaluate the terms of that assistance.

If you apply for any DPA, you should make sure that getting it helps meaningfully advance your homeownership goals without putting a burden on your finances.

The Bottom Line: Ensure Down Payment Assistance Aligns With Long-Term Financial Goals

Down payment assistance is meant to help homeowners with the upfront costs associated with a down payment and closing costs. DPA qualification can be similar to qualifying for a mortgage.

The assistance can be the difference between being able to buy a home and continuing to rent. You could also avoid PMI. On the other hand, not all down payment assistance programs are accepted and many have residency restrictions. If you don’t qualify or DPA doesn’t make sense, there are several alternatives including gift funds.

If you feel confident and you’re ready to take the next step in your home buying journey, you can apply online with Rocket Mortgage.

¹ Client will be required to pay a 1% down payment, with the ability to pay a maximum of 3%, and Rocket Mortgage will cover an additional 2% of the client’s purchase price as a down payment. This offer is only available on conventional purchase loans. Primary residence only. Cost of mortgage insurance premium not passed through to client. Offer valid only for home buyers when qualifying income is less than or equal to 80% area median income based on county where property is located. Must lock rate on or after 5/22/2023. Not available with any other discounts or promotions. Offer cannot be retroactively applied to previously closed loans or loans that have a locked rate. This is not a commitment to lend. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. Additional restrictions/conditions may apply.