For some would-be homeowners, one of the most challenging aspects of home buying is a down payment. Turning a monthly rental check into a mortgage payment may be no sweat for some. Keeping up with the responsibilities of owning? Bring it on. But, in certain cases, several thousand dollars down to secure your new digs? Easier said than done.
There may be options for well-qualified buyers who struggle to save enough or don’t have access to other qualifying down payment funds. One of these options may be a down payment assistance program (DAP).
What’s up with down payment assistance?
DAPs have been around since before the housing crash of 2008, and are offered by non-profits, cities, employers and state entities. Each down payment assistance program comes with specific criteria the borrower must meet in order to be eligible to receive assistance through the program. Some examples of these criteria are being a first-time homebuyer, or making a commitment to occupy the property for a certain amount of time.
Many of the programs have income limits to assist low-to-moderate income borrowers or require the purchased property to be within a certain geographic location in order to meet community lending or neighborhood revitalization goals. Sometimes a DAP goes beyond financial assistance to help home buyers prepare for homeownership, such as homebuyer education seminars or counseling.
A loan officer may suggest applying for a DAP because they may provide better value for the consumer than assistance offered through state finance agencies or bond programs where the first mortgage interest rate is increased to cover the down payment assistance.
A few types of down payment assistance programs are:
Subordinate Liens: the down payment assistance is in the form of a “second lien” on the subject property, meaning it’s a separate mortgage loan identified by its own Promissory note and mortgage deed. Some of these programs may carry a 0% interest rate and may have forgivable terms.
Gifts/Grants: the down payment assistance comes in the form of a gift or grant that does not need to be repaid so long as you own and occupy your home for a specified period of time.
Individual Development Accounts (IDAs): down payment assistance is in the form of a matched savings program where the entity offering the DAP will match all or part of the amount the borrower saves for the down payment.
Though organizations run their own programs, there is oversight by the Department of Housing and Urban Development, which sometimes steps in to revise or eliminate a program or a type of program. For example, after the housing crash of 2008, the government prohibited seller-funded programs.
If you’re in the market for a home and want to learn if you’re eligible for a DAP, contact a qualified loan officer to help you identify programs you may be eligible to apply for , but keep in mind not all lenders participate in all DAPs.