What Is Down Payment Assistance?

Down payments can often be one of the most challenging aspects of the homebuying process. Putting down an upfront amount can help reduce your monthly mortgage loan payments. However, getting the closing costs and down payment together may be difficult. In some cases, it may be helpful for buyers to find down payment assistance.

Down payment assistance refers to programs designed to assist homebuyers in covering the upfront expenses associated with home purchases. Depending on the program, these expenses can include the down payment for the home or closing costs. Down payment assistance programs may come from various organizations, including:

• The U.S. Department of Housing and Urban Development (HUD)
• State housing agencies
• Local housing agencies
• Private mortgage lenders
• Non-profit organizations
• Employers

Types of Down Payment Assistance

Down payment assistance programs come in different forms, including:

• Grants
• Forgivable loans
• Deferred payment loans

Each type has its own set of eligibility requirements and restrictions.

Grants

Down payment assistance may come in the form of grants. These are not subject to interest rates and do not need to be repaid.

Grants are usually available on a first-come, first-served basis. They are available to homebuyers who generally meet certain income thresholds or credit score requirements. The exact criteria will vary depending on the program.

Grants are typically most beneficial for low-to-moderate-income homebuyers and can come from state or national government agencies. However, some private lenders may offer some form of down payment grant as part of their larger loan program.

Forgivable Loans

Forgivable loans are another type of down payment assistance program. State or local government agencies may offer 0% interest. Some programs will forgive the loan if the borrower stays in the home for a certain length of time.

Unlike traditional loans with high-interest rates and strict terms, forgivable loans do need to be repaid. However, if the buyer ceases to remain eligible or sells the property prior to the completion of the forgiveness period, they may be liable to pay back the amount.

Deferred Payment Loans

Another option for down payment assistance is a deferred payment loan at 0% interest. It enables homebuyers to defer repayment until later, typically when the house is sold or when the mortgage is paid off.

A deferred payment loan is an option for homebuyers who may be unable to afford a second mortgage payment. State or local housing agencies and other lenders may offer deferred payment loans, but repayment terms vary.

Down Payment Assistance Eligibility Criteria

The eligibility criteria for a down payment assistance program differs based on who is offering it and for whom.

Some of the common eligibility requirements include the following:

Income Limits

One key consideration when looking at down payment assistance programs is income limits.

Income limits set by the programs are the maximum income thresholds that determine eligibility for receiving financial assistance. These limits can vary depending on the program and geographic location. Some programs may have specific income requirements, while others may be available to those with low-to-moderate incomes.

Credit Score

Credit scores may be another part of the eligibility criteria. Some down payment assistance programs may have specific credit score requirements to qualify. For example, some programs may require a minimum credit score of 620, while others may require a higher score.

Programs may also look at a homebuyer's debt-to-income (DTI) ratio alongside the credit score to determine eligibility.

Calculate it: find your debt-to-income ratio.

Property Requirements

Down payment assistance programs may also have property requirements as part of eligibility. 

For example, some programs may only be available for certain types of properties, such as primary residences. Some areas may also offer down payment assistance programs to attract homebuyers to move there. Additionally, some programs may have maximum purchase price limits to ensure that assistance is used for affordable housing.

Homebuyer Classes

Some down payment assistance programs require that buyers complete a series of classes on homebuying and finances. These pre-purchase classes may include counseling on topics such as home maintenance. They are often provided by HUD-approved agencies.

First-Time Homebuyer

If you're applying for first-time homebuyer first-time homebuyer down payment assistance, then you'll need to qualify as a first-time buyer. If you haven't owned a home in the last 3 years, most programs would consider you a first-time buyer.

How Does Down Payment Assistance Work?

Find a Down Payment Assistance Program

The best way to get started is to find what is available in your home state, county, and city. The HUD lists programs sponsored by state or local governments here.

Get in touch with a local mortgage loan officer that will be able to outline the programs available in your area.

Application Process

The application process for down payment assistance varies depending on the government program or participating lender. Understanding the type of down payment assistance offered is essential before applying. For example, some programs may specifically be designed for first-time home buyers. Other programs may depend on the household income or the location of the home.

Common features of the application may include:

• Providing financial information such as household income
• Income limits to the down payment assistance
• Credit score
• Type of property being purchased

Repayment Options

The repayment options for down payment assistance will depend on the type of program being offered and your financial situation. Some programs may require monthly payments over time, others may offer a lump sum payment at the time of sale or at the time of refinancing.

Repayment options must be considered to ensure that the program fits your needs and circumstances.

Tax Implications

Another aspect of down payment assistance to bear in mind is any potential tax implications that may come from it. Depending on the program, taxes may need to be paid on the assistance amount. Or, the property may potentially be subject to taxes.

Tax implications of down payment assistance will vary based on the program and factors such as property location and borrower income. Usually, down payment assistance is not categorized as taxable income, but this should be verified before applying to specific programs.

Related: Tax Benefits of Owning A Home

Get Started Today

To understand if down payment assistance is right for you get in touch with a local loan officer today.

This article is for educational purposes only and does not constitute financial or mortgage advice. Loan programs, rates, and guidelines may change at any time. All loans are subject to credit approval and underwriting. For guidance tailored to your situation, consult a licensed mortgage professional.