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How Down Payment Assistance Programs Work

How Down Payment Assistance Programs Work

  • Down Payment Assistance Program Overview
  • Down payment assistance programs help low-to-moderate income borrowers make a down payment when they buy a home. Saving money for a down payment can be one of the biggest obstacles to buying a home so these programs can be very helpful to home buyers. Additionally, the larger the down payment you make, the smaller the mortgage you need to buy a home. By potentially reducing your mortgage amount and monthly payment, down payment assistance programs can make home ownership more attainable.  Making a larger down payment may also enable you to afford more home.

    Depending on how they are structured, these programs can increase the equity you own in your home on day one when your mortgage closes and over time. Finally, while the primary purpose of down payment assistance programs is to help home buyers make their down payments on a home, in some cases the funds may also be used to pay for closing costs and limited property repairs  The most common type of down payment assistance program is the Community Seconds Mortgage Program.

  • How Down Payment Assistance Programs Work
  • There are three main types of down payment assistance programs. Although all three program types provide an initial grant to help home buyers make a down payment, the grant can be structured in different ways. Home buyers should carefully research and be fully aware of how their down payment assistance program works, including any financial obligations imposed by the program such as possibly being required to repay the grant. We review the three types of down payment assistance programs below:

    1) True Down Payment Grant. With a true down payment grant home buyers are not required to repay the grant at any point over the course of owning their home. Home buyers should think of this type of grant as a gift. True down payment grants impose no financial obligations or conditions that could require the borrower to repay the grant. These types of grants are typically smaller and limited to less than 3% of the home purchase price.

    2) Conditional Down Payment Grant. With a conditional down payment grant the grant is forgiven and home buyers are not required to repay it as long as they live in the home for a specified period of time, which is typically five years. If grant recipients sell the property or refinance the mortgage within the specified period of time, they are required to repay the grant on a prorated basis. If the borrower lives in the home beyond the specified number of years, then the grant essentially disappears and the borrower has no obligation to repay it. Conditional down payment grants typically range from 5% - 10% of the property purchase price although they are subject to size limits.

    3) Subordinated or Silent Second Down Payment Grant. With a subordinated second down payment grant borrowers are required to repay the grant in full, plus interest, when they sell or vacate their home or refinance or payoff their mortgage, regardless of how long they have lived in the property. This type of down payment grant is also called a “silent second” because it is structured similar to a second mortgage but the payments are deferred, which means you are not required to make a payments on the grant until a repayment event is triggered, such as selling your home. Deferring payments on the grant helps to keep your monthly mortgage payment affordable.

    When the buyer sells the property or wants to re-pay the silent second grant, in addition to paying back the principal balance of the grant, the buyer must also pay accrued interest, which is basically the interest expense that is incurred but not paid over the life of the grant. Silent second grants typically have a low interest rate, which is important because even though home owners do not make monthly payments on the grant, the accrued interest is due when they vacate the property.

    The interest on a down payment assistance silent second does not compound, which means the accrued interest is the same every year. For example, for a $50,000 grant with a 3.0% interest rate, a constant $1,500 in interest is added to the silent second loan balance every year. Down payment assistance programs typically offer silent second mortgages from a range of $1,000 up to a maximum of 20% of the property purchase price although borrowers may qualify for a larger grant as programs vary by city and state.

  • Down Payment Assistance Program Example
    Summary

    The example below shows how a down payment assistance program with a deferred-payment silent second grant can help a home buyer purchase a home with a significantly smaller down payment while paying the same monthly mortgage payment

    • In this example, the buyer uses the down payment assistance program for $51,000 of the $60,000 down payment required to purchase the property, making home ownership much more attainable for the buyer
    • Because the buyer uses the down payment assistance program, his or her monthly mortgage payment does not change because the buyer does not have to pay interest on the $51,000 silent second mortgage until the end of the mortgage or when the property is sold

    The example also shows the amount of principal and accrued interest due to repay the silent second at the end of the mortgage. The example assumes a 30 year mortgage term. If the silent second is repaid before 30 years, the amount of accrued interest will be less

    The silent second mortgage allows the borrower to purchase the home with a smaller down payment contribution, making home ownership more attainable
    Total amount due for silent second at end of mortgage including accrued interest
    Program Example No Program Down Payment Assistance Program
    Home Purchase Price $300,000 $300,000
    Required Down Payment (20%) $60,000 $60,000
    Borrower Down Payment Contribution $60,000 $9,000
    Silent Second Mortgage (17% property of purchase price) $0 $51,000
    First Mortgage $240,000 $240,000
    Monthly Mortgage Payment (at 4.0% interest rate) $1,146 $1,146
    Silent Second Principal Repaid at End of Mortgage $0 $51,000
    Silent Second Accrued Interest Paid at End of Mortgage (at 3.0% interest rate) $0 $45,900
    Total Due for Silent Second at End of Mortgage $0 $96,900
  • Where You Can Apply for Down Payment Assistance Programs
  • Most down payment assistance programs are offered by HUD-approved state and local housing agencies or commissions. These organizations are typically not-for-profit organizations that coordinate with federal, state and local governments to offer a range of home buyer assistance programs including down payment assistance programs, closing cost assistance programs and home buyer counseling.

    • Click STATE PROGRAMS and select your state to find HUD-approved housing agencies or commissions that offer down payment assistance programs in your area

    Housing agencies and commissions are not lenders and typically only offer home buyer assistance programs and not the actual mortgage required to buy a home. The organizations usually work with participating lenders to offer mortgages to home buyers in conjunction with the down payment assistance grant. For example, a home buyer seeking to purchase a $250,000 house could obtain a $42,500 down payment assistance grant from a housing commission and a $200,000 mortgage from an approved lender to buy the house with only a $7,500 personal financial contribution (3% of the property purchase price). Housing commissions and agencies are also familiar with other no or low down payment mortgage programs and can help home buyers apply for these programs with participating lenders.

    Home buyers should make sure they are working with a HUD-approved housing agency or commission before applying for a down payment assistance program or paying any fees. Some individuals and companies attempt to scam people by charging them to access down payment assistance programs. You should not pay anyone or any company who promises you a down payment grant in exchange for an up-front fee. To avoid being ripped off, we recommend that home buyers work directly with HUD-approved housing agencies and commissions listed on the HUD web site.

    In addition to HUD-approved housing agencies and commissions, some mortgage lenders offer down payment assistance grants directly to home buyers. These programs are relatively uncommon and typically provide a true down payment grant of up to 2% of the property purchase price, which is smaller than most other down payment assistance programs, although the borrower is not required to repay the grant at any time. This type of down payment assistance program enables home buyers to buy a home with a down payment as low as 1% and is offered by selected lenders including mortgage banks and mortgage brokers.

  • Down Payment Assistance Program Eligibility
  • Program eligibility and qualification guidelines for down payment assistance programs vary by city, state and program provider. Home buyers should contact their local housing agency, commission or lender to review the the following key items and determine if they qualify for a down payment assistance grant.

    Borrower Qualification Requirements

    Borrowers must meet credit score, financial and other qualification requirements to qualify for a down payment assistance program and mortgage. Many down payment assistance programs allow more flexible qualification requirements including lower credit scores and higher debt-to-income ratios. To qualify for a down payment assistance program a borrower typically can have a maximum debt-to-income ratio of 45%. A debt-to-income ratio represents the percentage of a borrower's monthly gross income that can be spent on total monthly housing expense plus other monthly debts such as credit card, auto and student loans.

    Please note that although housing agencies and commissions can help home buyers manage the down payment assistance and mortgage application processes, borrowers must be approved for the mortgage directly by the lender based on the lender’s qualification policies. Home buyers should work with their housing organization and lender to understand eligibility and qualification requirements before the apply for a mortgage and down payment assistance grant.

    Property Eligibility

    To be eligible for a down payment assistance program, home buyers must typically occupy the home as their primary residence and may not be permitted to own another property. The property is usually required to be a single-family residence such as a home or condominium and multi-unit properties are typically not eligible. Some programs also apply a maximum allowable property purchase price. The purchase price limit may vary depending on if the property is located in a federally designated targeted area. Other programs have a single purchase price limit for all properties.

    First-Time or Repeat Home Buyers

    Some down payment assistance programs require participants to be first-time home buyers while other programs are also available to repeat home buyers.

    Income and Asset Limits

    The borrower's gross income must be below the program maximum household income limit. Maximum household gross income is usually defined as a percentage of the area median income (AMI) with the income limit varying depending on the number of people in the home buyer's household. The more people in a household, the higher the income limit. Some programs establish income limits that are not linked to the area median income.

    Some programs also have asset and reserve minimums and maximums, which means that you are required to keep a minimum amount of assets in the bank, but that amount cannot exceed the specified asset maximum limit. The reserve minimum and borrower asset limit is applied at the time of closing.

    Minimum Home Buyer Financial Contribution

    Some down payment assistance programs require home buyers to make a minimum financial contribution, from their own funds, toward the purchase of the home, typically 1% to 3% of the property purchase, while other programs do not.  Down payment assistance programs that do not require a minimum borrower financial contribution enable you to buy a home without using personal funds.

    Mortgage Program

    Many down payment assistance programs require participants to obtain a 30 year fixed rate mortgage although some programs also permit 15 year fixed rate mortgages and adjustable rate mortgages (ARM). Interest only mortgages are typically not permitted under program guidelines.

    Home Buyer Counseling Class

    Most down payment assistance programs require participants to complete a HUD-approved home buyer counseling class. The class focuses on helping borrowers understand how mortgages work as well as the financial commitment required by home ownership. Some housing organizations offer the class for free while other programs charge a fee for the class.

    Impound Account

    Down payment assistance programs require home buyers to pay property taxes, homeowners insurance and mortgage insurance into an impound account on a monthly basis. An impound account is a trust account controlled by the lender from which certain third party expenses such as taxes and insurance are paid when due.

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