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What Is Down Payment Assistance And How Can It Help You?

Kevin Graham10-minute read
August 09, 2021

*As of July 6, 2020, Rocket Mortgage is no longer accepting USDA loan applications.

There are lots of great reasons to buy a home. To name just a couple, it’s often cheaper to buy than to rent, and you’re building an equity investment in a property that’s yours. While this is desirable, buying a home does require a significant upfront investment.

Chief among these costs is the down payment, which often presents the biggest hurdle on the track to homeownership, particularly for first-time home buyers. There are a couple of things to know if you find yourself wondering how you’ll be able to get a home of your own. First, low down payment options may mean you don’t need as much money upfront as you think. Second, down payment assistance programs may give you the boost you need to be able to put down your roots.

This article will go over the ins and outs of down payment assistance and how it can help when it comes time to buy your home.

What Is Down Payment Assistance?

Down payment assistance is just what it sounds like: programs that help you afford a down payment. That said, this assistance can take several forms. Let’s dig into these next.

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Types Of Down Payment Assistance

There are varying types of down payment assistance, but it generally breaks down into one of four categories: loans, grants, employer assistance, and special savings accounts.

Loans

There are a few different types of loans that are typically available to home buyers looking for help with a down payment. These are either paid concurrently with the mortgage, paid off when the property is sold, refinanced or no longer occupied, and still others that may be forgivable if you live in the house for a certain amount of time.

It’s important to note that not all lenders will let a home buyer fund their down payment with loans.

Second Mortgage Or Home Equity Line Of Credit (HELOC): With a second mortgage or HELOC, you make payments concurrently with your primary mortgage on a smaller loan that covers your down payment. In a purchase situation, these are often used in conjunction with the primary mortgage and a small a down payment either to access funds to fix up a home or avoid paying private mortgage insurance (PMI) on a conventional loan. Rocket Mortgage® 1 doesn’t currently offer second mortgages or HELOCs.

Loans Paid On Sale: A different type of second mortgage is paid off when you move, sell or refinance the property. Up until that point, there are no monthly payments. If you get the loan through a government program, it may be interest-free. Others may have lower interest rates than your primary mortgage, while there are options with higher interest rates as well. It’s important to pay attention to the terms.

Forgivable Second Mortgage: With this type of loan, all or a portion of the loan balance is forgiven if you live in the house for a defined number of years. If you move, sell the home, refinance or finish paying off your mortgage before that period is up, you have to pay off the portion of the loan that would otherwise be forgiven. These are usually silent seconds, meaning there’s no monthly payment as long as you live in the home. You should know that it can be harder to get a mortgage in this arrangement because lenders are wary of any option restricting the sale of your home. This is because one of the primary ways mortgages are paid off is through the sale of the home.

Grants

Grants may well be the best type of down payment assistance because if you can get one, it’s free money. You may be thinking if it’s free, it’s for me. Before you apply for a grant though, there are things you should know.

You can get grants from a variety of sources including nonprofits and state housing authorities. However, look around and make sure you qualify. There are often different programs available targeted at different demographics and population areas. We’ll get into this more below.

Finally, if you’re getting a grant, it can’t be structured in such a way that you would be the only person who ever qualifies.

Employer Assistance

Employers may also give you money for buying a home. This can come in the form of grants or second mortgages. The company may also give you an unsecured loan that’s not actually tied to the home. In either case, the payments may or may not be forgivable and may or may not have deferred payments. For example, a loan may be forgivable if a person works at the company for a certain number of years.

It’s often easier to get approved for a mortgage through one of these programs than if you had gotten a loan through another source for your down payment. Employer assistance is viewed as an accepted company benefit and carries less risk in the mind of lenders.

Special Savings Accounts

Another option in your state may be a savings account with some special properties. It’s not available everywhere, but there are a few options out there.

State legislatures have begun to create accounts where people saving for a home can put money that would be tax-deductible. Interest earnings may also be tax-free.

There are also some state savings accounts like this one offered in Indiana that match savings for home buyers up to a certain level. This could help supercharge your savings strategy.

How Do You Qualify For Down Payment Assistance?

It’s very important when you’re looking around for down payment assistance to know that these programs often have strict qualification requirements, many of which you may not be able to control. Here are a few of the factors that may be used to judge whether a home buyer fits the assistance criteria.

Location: Many forms of assistance have restrictions around the geographic area they’re meant to cover. Most states have their own variations of programs. Additionally, cities can offer their own assistance to residents in their area.

Previous Homeownership Status: If you’ve owned a home previously, that can sometimes play a role in whether you qualify – many programs require you to be a first-time home buyer. However, even here, it’s important to know what the rules are because not everything is black and white. For example, major mortgage investors like Fannie Mae, Freddie Mac, the FHA, etc. consider a first-time home buyer to be anyone who hasn’t owned residential property in the last 3 years. Be sure to pay close attention to the definition given based on the program you’re applying for.

Occupancy Requirements: As mentioned above, there are often stipulations that you have to remain in the house for a certain amount of time. If you don’t, you may be forced to pay back all or part of a loan that would otherwise be forgivable.

Income: Down payment assistance programs are often intended to benefit low- to moderate-income home buyers. Therefore, it’s important to know any income limits that may be associated with the program you’re applying for.

One or more of these qualification factors may play into whether a particular assistance option is a fit for you.

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Where Can You Find Down Payment Assistance?

The Department of Housing and Urban Development (HUD) is very concerned with affordable homeownership access. To that end, it has a couple of initiatives that are worth discussing here.

The first is the Homeownership and Opportunity for People Everywhere (HOPE) program. The goal of HOPE is to help low-income residents buy public housing. Money is given to public entities as well as nonprofit organizations and resident groups for things like rehabbing properties, as well as financial assistance options like help with down payments.

More broadly, HUD maintains a directory of many of the available local home-buying programs, broken down by state. This is often the best place to start when searching for various types of assistance.

You can also look for nonprofits that have housing as part of their mission. They may have a certain number of grants they can give each year. Even if they personally can’t help you, they may be able to help you find other organizations that work in a similar space.

Finally, states and sometimes even local governments have the housing authorities that may be able to provide you with various resources, including down payment assistance. Familiarize yourself with the programs in your area.

Is There Down Payment Assistance For FHA Loans?

A common question is whether down payment assistance exists for FHA loans. FHA loans are a popular option because you don’t need perfect credit – you can qualify with a median FICO® Score of 580 or higher as long as you maintain a fairly low debt-to-income ratio (DTI).

You can also get down payment assistance for FHA loans as you would with a conventional, USDA or VA loan. An FHA loan can be a good option for someone in the right situation.

How Much Can You Save With Down Payment Assistance?

How much you’ll save by using down payment assistance is going to vary widely based on the specifics of the program you qualify for, but one study released in 2016 said that the average person using down payment assistance saves $17,766 over the life of the loan.

Together with credit scores, the size of your down payment is one of the key factors that impacts your interest rate. Therefore, anything that enables you to make a higher down payment will save you money in the long run. Additionally,if you were able to use assistance to help you achieve a down payment of 20% or more, you also save money on a monthly basis by not having to pay mortgage insurance on conventional loans.

Alternative Down Payment Options

If grants or other down payment assistance aren’t an option for you, one thing you can do is get a gift. There are a variety of acceptable donors for conventional and jumbo transactions:

  • Spouse/domestic partner/fiancé(e)
  • Parents (including step- and foster)
  • Grandparents (including great-, step- and foster)
  • Aunt/uncle (including great- and step-)
  • Niece/nephew (including step-)
  • In-laws (parents, grandparents, aunt/uncle, brother/sister)
  • Child (step-, foster and adopted)
  • Sibling (step-, foster and adopted)
  • Cousin (step- and adopted)

Fannie Mae expands this list to let you get a gift from future in-laws.

If you’re getting a loan through the FHA, you can get a gift from any of these family members, but the guidelines are expanded to let you also get a gift from the following:

  • Employer
  • Labor union
  • Charitable organization
  • Governmental agency/public entity
  • Close friend who has a clearly defined interest in you (his could be anyone from ex-spouses to foster siblings.)

The USDA and VA have flexible requirements regarding who the donor can be as long as it isn’t someone with an interest in the transaction. Interested parties would include, but aren’t limited to:

  • Seller
  • Builder or contractor
  • Developer
  • Real estate agent

Your donor would have to write a letter stating that the gift wouldn’t have to be paid back. If this sounds like an option for you, there are other gift letter requirements.

The minimum down payment depending on the type of loan you’re getting is typically anywhere between 3% – 5% for a one-unit primary property. If you’re getting a gift for such a property, the entire down payment can be covered by the gift if needed.

There are a couple of loan options that don’t require a down payment at all. Let’s quickly touch on these.

VA loans are available for eligible active-duty servicemembers, reservists, veterans and surviving spouses of those who passed in action or as a result of a service-connected disability. There’s no down payment required and instead of mortgage insurance there’s a one-time funding fee that can either be paid at close or tacked on to the loan principal.

The amount of the funding fee varies based on the size of your down payment (if any) as well as whether you were active-duty. Finally, it’s a slightly higher fee if it’s a subsequent use of a VA loan compared with your first time. The funding fee is anywhere between 2.4% – 3.6% of the loan amount. This funding fee is waived if you’re getting VA disability or you’re an eligible surviving spouse.

USDA loans are an option for those who live in rural areas, or at least on the edge of suburbia. If you live in an eligible area, you could qualify for a 0% down payment on a 30-year fixed loan.

There are income restrictions to this loan. The combined income of every adult in your household may not exceed 115% of the area median income. You can make deductions from your income for childcare expenses. Additionally, if someone in your family is a full-time student, only the first $480 of their income is counted for qualification purposes if they aren’t on the loan or are the spouse of someone who is.

Preapproval is typically quick, easy and low pressure, and it’s a great way to see where you’ll stand with lenders during your home buying process. You don’t have to have everything about down payment assistance figured out before applying. After submitting your application, you’ll start working with the lender, and they can help you with options.

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1Rocket Mortgage® and Rocket HQSM are separate operating subsidiaries of Rock Holdings Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation, and applicable legal and regulatory requirements.

Kevin Graham

Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage he freelanced for various newspapers in the Metro Detroit area.