Down payment assistance: A little leg work can save you money
Down payment assistance outlined
- Down payment assistance differs from a piggyback loan.
- The assistance can be a grant, which doesn’t have to be repaid.
- It also can be a low-interest loan, which often has deferred payments.
- Down payment assistance can be paired with FHA and conventional loans.
Most loan programs require a homebuyer to put money down on a home.
Although this can be as little as 3.5 percent of the total loan amount for Federal Housing Administration (FHA) loans and 3 percent for certain conventional home mortgage loans, the down payment often represents the greatest single hurdle for a first-time borrower.
But it doesn’t have to be that way.
Across the country, homebuyers can often get help from down payment-assistance programs that will cover a portion or the entire amount needed for the down payment and closing costs.
Down payment assistance differs from “piggyback loans,” which are second liens against the property and have been widely used to beef up a down payment to avoid paying mortgage insurance. Those second loans or lines of credit usually come with higher interest rates.
Down payment-assistance programs, by contrast, are often sponsored by states, counties and municipalities that want to encourage homeownership. Nonprofits also sponsor these programs.
Often the help is exclusively designed for first-time homebuyers and people with lower incomes, but that is not always the case. According to surveys, as many as two thirds of the down payment-assistance programs offered in the United States don’t require the borrower to be a first-time homebuyer.
These programs can be structured in many ways. In some cases, this assistance comes in the form of a grant, and doesn’t have to be repaid or is retired gradually. Sometimes, the balance owed by the borrower diminishes with the number of years that the homebuyer remains in the house. The assistance also can come as a low-interest loan, and has to be repaid. The payments, however, are sometimes deferred for many years.
Rob Chrane, president of Downpaymentresource.com, which has compiled a national database, said that the number of programs have been rising across the country. In June 2015, the company estimated that more than 2,300 programs were now in place. The actual programs, however, often change their requirements, and the programs differ in their features and structure.
He said the programs are most commonly paired with a Federal Housing Administration (FHA) loan, but down payment assistance can also be used with conventional loans purchased by Fannie Mae and Freddie Mac.
“There are a lot of opportunities to layer these with a conventional loan,” Chrane said. “Both Fannie [Mae] and Freddie [Mac] have first-mortgage products that will allow this type of down payment help.”
Aside from down payment assistance, borrowers can also sometimes qualify for tax credits that could save the borrower thousands of dollars annually.
“One example that is not down payment help, but is a great benefit to homebuyers, is what is called mortgage-credit certificates,” Chrane said. “Those are a direct federal-tax credit as opposed to an interest deduction. There are some variables that determine how much of a tax credit, but the maximum is $2,000 annually over the life of the loan. It is not money upfront to get into the home, but it is money that can add up and be substantial.”
Many borrowers, he said, are unaware that the assistance is out there, and that it is worth the time for a borrower to investigate their local options and ask their lender or Realtor for information about available programs.
“Bottom line, I would say, there are no disadvantages,” he said.
“It is an extra step. It takes a little more effort, but when you think about the benefits you can gain, why not go the extra effort.”