Times are tough for homebuyers. In an environment of historically high interest rates and stubborn listing prices, the dream of homeownership is as elusive as ever. But if you believe (mistakenly) that you absolutely have to save 20% for a down payment, it’s going to be much harder to buy a home.
In fact, the average down payment for first-time home buyers was just 8% in 2023, according to the National Association of Realtors. Part of the reason is due to the Down Payment Assistance (DPA) program. These programs can significantly lower the amount you need for a down payment, which can be as little as 3% or 0% of the purchase price, depending on the type of mortgage you qualify for.
learn more: A guide to first-time homebuyer programs and loans.
There are currently more than 1,600 DPA programs across the United States whose work creates access to ownership for people who have historically faced higher barriers, including low-income buyers, people of color, and rural buyers. It has been useful for. Depending on your situation, one of these programs could be of great help. Here’s what you need to know.
What is down payment assistance?
Down Payment Assistance (DPA) is a formal subsidy that helps cover the upfront costs of buying a home or reduces the contribution required towards the purchase. Most DPA funds are awarded based on income and are available through the state, but you may also be able to find them through your county or local government or nonprofit organization.
Depending on the program, the assistance you may be eligible for may include a loan (which may be forgiven) or a grant to cover some or all of your down payment and closing costs. This assistance is usually available at little or no cost.
4 main types of down payment assistance
Some DPA programs can be tiered, so using multiple programs can make your purchase more affordable. Additionally, some programs partner with lenders to offer special financing terms. For example, a lender may offer a lower APR or waive the requirement to pay private mortgage insurance (PMI). The main types of support to look for are:
loan
By far, the most common type of DPA is a loan, also known as a second mortgage.
The idea of having two mortgages may be scary, but these down payment loans aren’t too similar to the mortgages you’re familiar with. In many cases, the annual interest rate is 0% and no payments are due for 10 years or more. If you live in the home for a certain period of time, part or all of your loan may be forgiven.
grant
Another form of down payment assistance, although less common, is grants. This is money that does not need to be repaid. Depending on the program, you may be eligible to receive a grant up to a set amount or a set percentage of the down payment or purchase price.
saving match
Some programs allow you to use a portion of your savings as a down payment. When you deposit your savings into an eligible bank account, you can receive an amount equal to a fixed portion of each dollar you deposit, or you can receive an amount equal to your funds up to a set amount.
tax credit
The Mortgage Credit Certificate (MCC) is an annual income tax credit that can make homeownership more affordable by reducing your federal income taxes. If you qualify for MCC, it will be easier to meet your lender’s mortgage affordability requirements. That’s because lenders can take MCC into account when calculating your income and expenses.
How can I get down payment assistance?
Approximately 60% of all DPA funds are targeted at first-time homebuyers, but help is also available to repeat buyers. Other qualifications that typically must be met include:
- income: The most common requirements for assistance are income-related, and many programs have income limits based on the area’s median income.
- past ownership: If you’ve owned a home in the past three years, you generally don’t qualify for down payment assistance for first-time homebuyers.
- Buyer’s contribution: You may need to donate some of your own money to cover part of the purchase.
- debt to income ratio: The most common reason for rejection is a high debt-to-income ratio. This means your monthly debt payments (including your new mortgage payment) are too high relative to your income.
- credit score: The minimum credit score requirement may be around 640, but some programs may have much lower requirements.
- Employer/Affiliation: Some employers and tribal organizations offer their own DPA programs. If you are a teacher, first responder, or military member, you may qualify for a special DPA program.
- residence: The home you purchase must be your primary residence.
How to receive down payment support
The order of steps to apply for down payment support varies by program, but here’s what you can generally expect:
- explore options. Use resources like Fannie Mae Down payment support search tool This will help you find out what you are eligible for.
- Apply for the program. To verify your eligibility, you may be required to submit a lengthy list of documents, including copies of bank statements, retirement account statements, and pay stubs.
- Home buyer education. If applicable, complete the program’s housing counseling or education requirements. Doing this as early in the process as possible will make you a more knowledgeable buyer.
- Find a lender: Select a lender approved by the DPA program and apply for loan pre-approval. Even if the list of approved lenders is short, be sure to compare multiple offers and negotiate the best terms available.
- buy a house: Follow the program timeline and use your loan pre-approval and DPA information to find a home you can afford.
- buy: Work with all parties involved (lender, DPA program, real estate agent) to ensure DPA funds are properly applied to the purchase at closing.
learn more: Step-by-step instructions on how to buy a home.
Where can I get down payment assistance?
You can find more than 2,000 homebuyer assistance programs in the United States. Although there are federal DPA programs available (which do not include grants), the majority of programs are state-based, with many states having more than 50 different programs. According to urban research instituteAs of 2023, the states with the highest and lowest density of DPA programs available are:
10 states with the highest density of DPA programs
According to Urban Institute data, the states with the most DPA programs are:
- California
- florida
- texas
- maryland
- new york
- minnesota
- colorado
- Massachusetts
- pennsylvania
- wisconsin
10 states with the lowest density of DPA programs
According to Urban Institute data, the states with the fewest DPA programs are:
- wyoming
- north dakota
- Hawaii
- vermont state
- Delaware
- maine
- mississippi
- alaska
- west virginia
- arkansas
To narrow down your options, visit the U.S. Department of Housing and Urban Development (HUD) website. housing support directory By state. For additional programs, check what’s available at the local level through your county or certified nonprofit organization, or what your bank or credit union offers.
takeaway
If you have limited resources, help may be available. Thanks to down payment assistance programs, you don’t have to be rich to buy a home. It’s true that it may take some time and effort to find the support program that’s right for you. But for some homebuyers, these loan programs may be the best way to make their homeownership dreams a reality.
