For some borrowers, saving for the required down payment on a home can be difficult. However, there are programs out there that allow you to receive down payment assistance. Some options for help may be in the form of a low-interest loans, or from grants from a state or local agency.
How Down Payment Assistance Works
Prior to the signing of the Housing and Economic Recovery Act of 2008, there were many down payment assistance organizations. Many of these worked when the seller of the home made a “donation” to the organization. The organization then made a “gift” to the buyer to help pay for the down payment. While there are still some of these programs available for use with conventional loans, lenders that accept them are few and far between.
More common arrangements are for certain organizations to offer loans to buyers to help them pay for the down payment. The down payment help is usually in one of two forms:
- A grant that doesn’t have to be paid back.
- A low interest loan that you pay back later.
Most of the time, though, a buyer has to be considered a first-time homeowner before qualifying for these types of programs. You receive money that you give to the lender as a down payment on a conventional loan. If the down payment came from a loan and not a grant, you repay that loan as you repay your mortgage.
Certain non-profit organizations also offer down payment assistance. Programs such as the Florida Housing Financing Corporation or the California State Teachers’ Retirement System offer low-interest loans, or deferred payment loans, to buyers. The buyer can borrow the amount they need for a down payment, and then repay this smaller loan later.
Some banks may even provide down payment assistance. In this case, you borrow the amount needed for a down payment (often at a higher interest rate), and it is considered a second mortgage. These arrangements are hard to make, since the lender is taking on additional risk and the borrower still doesn’t have much skin in the game. These programs have become rare since the onset of the financial crisis.
Another option is to consider sweat equity. In some cases, non-profit organizations will help you make a down payment if you help build your home. Most of these are local programs, like the Community Development Corporation in Utah and the Homeless to Rehab Sweaty Equity program in D.C. You may also be required to help others in the program build their homes as well. However, the money is usually a grant that you don’t have to pay back, and many borrowers consider the work a fair trade for money for a down payment.
FHA Loans and Down Payment Assistance
One important detail to note before you turn to down payment assistance is that you can’t use these programs in conjunction with Federal Housing Administration (FHA) loans. Since its signing by President Bush in 2008, the Housing and Economic Recovery Act prohibits seller-funded down payment assistance programs for loans that the FHA backs.
This means that, in order to get down payment assistance for a FHA loan, you have to receive the money as a true gift. You’ll even be required to sign legal documents stating that you will not repay the down payment money.
Even though you can’t use many of these types of down payment assistance programs for a FHA loan, they can still be helpful when you get a conventional loan. Consider your options, and decide what is likely to work best for you.