Buying a home is a major expense and if you’re taking out a mortgage, one of the things you need to plan ahead for is your down payment. For a conventional loan, 20% is the target amount buyers are encouraged to aim for if they want to avoid paying private mortgage insurance. For an FHA loan, you’re only looking at a 3.5% down payment, but that can still add up to some serious cash.
Down payment assistance programs are designed to ease some of the financial burden for qualified buyers. According to RealtyTrac, 87% of homes nationwide qualify for some kind of down payment help. If you’re planning to buy but you’re strapped for cash, here’s what you need to know about down payment assistance options.
How down payment assistance programs work
The idea behind down payment assistance programs is simple–they help buyers who otherwise wouldn’t be able to raise down payment funds on their own. There are three basic ways these programs can work.
First, there are programs that offer you a cash grant that you can use for your down payment. In exchange for the money, you’re required to live in the home for a certain number of years. If you move out before the cutoff, you’ll have to repay the grant. Depending on the program, there may also be certain requirements about where the property is located or what kind of structure it is.
Next, there are savings incentive plans that offer a matching contribution when you save money for a down payment, up to a certain limit. You have to set up a dedicated savings account for your down payment funds and the amount of the match can vary, with some programs matching as much as 100% of what you set aside.
Finally, there are down payment assistance programs that allow you to take an interest-free second mortgage on the home. Basically, you’re borrowing the money for your down payment but you’re not paying any interest on it. Depending on how the loan is structured, you may not have to pay the money back until you sell the house.
How much money can these programs offer?
There are more than 2,000 down payment assistance programs to choose from at the federal, state and local level and they all vary in terms of how much of a financial benefit they offer. A joint analysis from RealtyTrac and Down Payment Resource found that on average, home buyers receive $11,565 in aid from one of these programs. If you’re buying a $200,000 home using an FHA loan, your 3.5% down payment would come to $7,000, which could easily be covered by down payment assistance if you’re eligible.
Who qualifies?
Down payment assistance programs are open to a wide range of buyers but each program has its own eligibility requirements. In general, you have to be within the income guidelines specified by the program. The amount you can earn is determined by the median income in the area where the home is located.
Depending on the program, you may be able to earn between 120% and 140% of the median area income for your household size and still qualify for assistance. Buyers may also have to complete a home-buying education course as a condition of receiving help.
Look for programs that also cover closing costs
Besides your down payment, you’ll also need another 2% to 5% of the purchase price to cover closing costs. Some down payment assistance programs do double duty and let you use the money towards closing as well. When you’re researching the different programs that are available in your area, check to see how much flexibility you have when it comes to what you can do with the funds.
