Understanding Down Payment Assistance

A wooden house model with "down payment assistance" stamped across next to a calculator showing there a down payment assistance programs available to homebuyers.

Down payment assistance is available for people who want to become homeowners but need a little extra help.

In the NFCC’s latest financial literacy survey, they found that one in two Americans who have tried to purchase a home have faced barriers. One of the top barriers people always cite is lack of funding for a down payment or closing costs.

Sometimes this barrier to homeownership is real and needs to be overcome with budgeting, debt counseling, or some other kind of assistance. But sometimes it’s only the borrower’s perception that there is a barrier. The truth is, being short on funds for a down payment may not be as big a problem as home buyers think.

Understanding down payment assistance is crucial for new home buyers who are ready to take the leap into homeownership but aren’t sure they can afford that initial investment of down payment and closing costs.

Down payment assistance takes many forms

Help with a down payment may be available to borrowers from multiple sources, and eligibility guidelines can vary with different program:

  • Government—Your local, city, or state government might have special housing programs to help you. They have access to programs from HUD, like the HOME Investment Partnerships Program and the Community Development Block Grant Program. You might be able to get help from the USDA if your home is in an eligible rural area, or get a VA loan with as little as 0% down if you are a veteran. There are also programs like the Section 184 Indian Home Loan Guarantee Program that can lower the down payment for certain buyers.
  • Community Service Workers—if you work in a particular community service profession, like a firefighter or public school teacher, you may be able to get special down payment assistance to live in the community you serve. HUD’s Good Neighbor Next Door is one example of this kind of program, and your local community might offer more options.
  • Your Employer—some employers, like educational institutions and government, offer down payment assistance for their employees. Check with your benefits or human resources department to see if your employer has any kind of homebuying assistance program. Some private employers may also offer relocation incentives to new hires to get them to move to a new city.
  • Gifts From Family—if your lender allows it, you may be able to accept a gift from family to help finance your down payment. It must be a gift and not a loan, however, and the giver must be approved by the lender for the funds to be used toward your mortgage.

The way the down payment assistance is delivered to you varies as well.

  • Reduced down payment—instead of providing funds to cover part of your down payment, some assistance programs lower the down payment required, making it easier for you to get into homeownership without needing as much cash up front.
  • Loans—some down payment assistance comes in the form of a loan that you repay along side your primary mortgage
  • Deferred mortgages—some assistance loans come as a kind of second mortgage that you don’t have to make payments toward until you’ve paid off the first mortgage, or move, refinance, or sell your home.
  • Grants—are simply gifted to you, with no need to repay. There will be conditions on how the funds are used—in fact, they will likely just go straight to your lender to cover all or part of your down payment.
  • Tax Credits—You might be eligible for a mortgage credit toward your taxes. The reduced tax burden frees up funds to apply to your down payment.

First-Time Homebuyers

Most down payment assistance is targeted at first-time homebuyers. That doesn’t necessarily mean you can’t get assistance if you’ve never owned a home before. Many circumstances can make you a first-time homebuyer:

  • Returning to home ownership—if you used to be a homeowner but haven’t owned in the past 3 years, you are considered a first-time homebuyer by the FHA.
  • Divorced—If you are a single parent who recently got divorced and the only home you’ve ever owned was with your ex-spouse, then you might be considered a first-time homebuyer.
  • “Displaced Homemaker”—similar to recent divorcees, a displaced homemaker can be considered a first-time homebuyer if they’re coming out of a particular situation, like they were providing live-in care for an ailing family member, or have lost the financial assistance of family, or have been having difficulty finding gainful employment.
  • Your home was not a permanent structure—if you only owned a mobile home or RV that was not attached to a permanent foundation, then you would be considered a first-time homebuyer.
  • Damaged property—if the only home you’ve ever owned was severely damaged (it’s not currently livable and the cost to repair would exceed the cost to build a new home), then you could qualify.

While most down payment assistance is directed at first-time homebuyers, that’s not always the case. It’s always worth looking into available options and programs to make getting into a home easier.

Accessing Down Payment Assistance

Because there are potentially thousands of local down payment assistance programs across the US, it’s important that you get help accessing everything that is available to you.

  • Homebuyer Education—start with a first-time homebuyer education course. This will make you eligible for certain kinds of home buyer assistance, but more importantly, you will learn how to take the right steps to be a successful homeowner from the very beginning. You’ll learn where to go and whom to ask for assistance when you need it.
  • Homebuyer Counseling—get one-on-one assistance from an experienced professional so you can identify the special loans and down payment assistance that are the best fit for your situation.
  • HUD and FHA.com (FHA.com is not a government agency), access a nationwide list of potential assistance programs. Be sure to discuss these options with a home ownership counselor or coach before you apply. Talk to a housing counselor at a HUD-approved housing counseling agency to get information about what is available in your area.
  • Your lender—some lenders have expertise in down payment assistance programs. Ask if your lender does, and remember it’s always a good idea to comparison shop. Lenders will want to see you succeed as a borrower, so it’s in their interest to pair you up with the programs that can help you the most. They will want to know that you’ve completed home buyer education and gotten a certificate of completion, as that will give you access to the best FHA and other loan options.

The most important thing about understanding down payment assistance is that you shouldn’t go it alone. There are programs targeting different regions, cities, and types of properties, and they’re always changing. An internet search is likely to show you information that is outdated and could lead you down the wrong path.

Your best bet is to work with a professional. Talk to a housing counselor or ask your lender about down payment assistance. Ask your realtor, too. Don’t wait for anyone to offer you access to an assistance program; be proactive and ask everyone you work with. If you don’t know whom to talk to or what questions to ask, then get first-time homebuyer education before you start the homebuying process.

Article written by
Melinda Opperman
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over two decades of experience in the industry.

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