While there’s no question that one of the biggest challenges first-time homebuyers face is to accumulate the funds for a down payment, the reality is that would-be buyers often overestimate the amount of money they’ll need and underestimate their ability to qualify for down payment assistance programs.
A recent survey by Zelman & Associates showed that most renters believe they must make a down payment of 11 percent to 15 percent and 39 percent thought the minimum down payment required is 15 percent.
Yet Freddie Mac reports that more than one in five borrowers in 2015 had a down payment of less than 10 percent. Federal Housing Administration (FHA) loans require a down payment of just 3.5 percent.
Even with a lower down payment, you’ll need some cash to buy a home regardless of whether you’re opting for a newly built or used home. The median price for a newly built home in November 2016 was $304,500, which means you’ll need a down payment of $10,657.50 for a 3.5 percent down payment; $15,225 for a 5 percent down payment; or $30,450 for a 10 percent down payment. The good news: There are more than 2,000 down payment assistance programs available across the country.
Eligibility for these mostly state and local programs depends on a variety of factors including the borrowers’ income and the home price. According to Rob Chrane, president and CEO of DownPaymentResource.com in Atlanta, an average of 70 percent of all homes for sale could be eligible for one or more homeownership programs.
Prospective buyers often focus on the need for down payment funds, but homeownership programs offer a variety of assistance to buyers including:
- Down payment and closing cost assistance that must be repaid if you sell before a certain time, such as 5 or 10 years or when you sell the home,
- Down payment grants that do not have to be repaid,
- Low-interest home loans or
- Mortgage Credit Certificates (MCCs), which are federal income tax credits for the life of the loan to help low-to-moderate income borrowers afford their housing payments.
“Most homeownership programs are hyper-local to cities or even particular neighborhoods, but many are also state programs run by each state’s housing finance agency to encourage homeownership,” says Chrane. “It can be very difficult for consumers and even for Realtors and lenders to find out about all the programs that can potentially help someone buy a home.”
Chrane developed DownPaymentResource.com about six years ago to provide a single database for real estate professionals and consumers to access information about homeownership programs and their eligibility requirements. There are currently 2,085 programs in the system, with more added as they become available.
Eligible homebuyers who use DownPaymentResource.com receive an average of $5,000 in homebuying assistance, but the amount of assistance available can go as $100,000 in high-cost areas such as parts of California, says Tonya Todd, senior vice president for affordable housing programs with Mountain West Financial in Redlands, Calif.
Chrane says use of the site is licensed to Multiple Listing Services (MLS) and financial institutions. Homes listed on licensed MLS systems will have a symbol to indicate eligibility for homeownership programs. Consumers can go directly to the site to look for programs and real estate professionals such as lenders and Realtors can also search the site on behalf of prospective buyers. The list of programs include those run by state housing finance agencies, local government or nonprofit agencies and employer-assisted homeownership programs.
“Most homeownership programs are equally available to buyers of newly built homes and resales,” says Carrie Powers, a mortgage loan officer with Silverton Mortgage in Marietta, Ga. “Sometimes extra assistance is available to buyers in new-home communities directly from the builder for closing costs as an incentive to buy. Sometimes there are incentives for builders to build new homes in a targeted community and then extra assistance will also be offered to buyers.”
While some homeownership programs are designed to work with FHA loans because that loan program is meant to help low-to-moderate income buyers and first-time buyers, many buyers use down payment and closing cost assistance along with conventional, VA and USDA home loans, says Todd.
“If you want to make a 20 percent down payment on a conventional loan, you can use 10 percent of your own money and 10 percent from a down payment assistance program,” says Powers. “The assistance can also be used for closing costs.”
Government Assistance Loans
There are a number of government assistance programs and grants that offer financial aid to first-time homebuyers. Most commonly known is the basic Federal Housing Administration, or FHA loan, which can help first-time buyers purchase a single family home. The U.S. Department of Agriculture, or USDA, has a homebuyer assistance program that focuses on homes in rural areas. The U.S. Department of Veterans Affairs (VA) has a VA loan that helps active-duty military members, veterans and surviving spouses buy new homes. The U.S Housing and Urban Development, or HUD, offers a number of mortgage programs for families, including adjustable rate mortgages, basic home mortgage loans, and home equity conversion mortgages for seniors.
Eligibility for Aid
Freddie Mac reports that more than one in five borrowers in the first two quarters of 2014 took out a conventional loan with a down payment of less than 10 percent. FHA loans require a down payment of just 3.5 percent.While some of these programs are limited to first-time buyers, the official definition of a first-time buyer is looser than you might expect. According to the U.S. Department of Housing and Urban Development (HUD), a first-time buyer is someone who has not owned a primary residence in the previous three years, says Todd.
“Most programs have income limits (that) are tied to the area median income and vary according to the number of people in the household,” says Todd. “While many of them are limited to borrowers who make up to 80 percent of area median income, some programs go as high as 140 percent.”
In addition to income requirements, many homeownership programs have a maximum sales price based on median home prices in the area, says Chrane.
“There’s a myth out there that down payment assistance programs are only available for low income families and for low cost housing, but the truth is that in places with high housing costs like San Francisco, you can get help to buy a house as expensive as $700,000,” says Chrane.
Even those programs that lack a maximum sales price limit are essentially limited because of the income limitations, since buyers wouldn’t qualify for a loan to purchase a home out of their range of affordability.
Powers says many programs have asset limits such as a maximum of $10,000 to $20,000 in liquid assets because the programs are targeted to those who need help amassing enough funds for a down payment.
“Most of the programs require a minimum contribution from the buyers, such as $500, $1,000 or 1 percent of the sales price,” says Powers. “Everyone wants the buyers to have some skin in the game.”
Some homebuyer programs have been created to help people in specific careers, such as teachers, policeman, firefighters and health care professionals, become homeowners.
Since buyers who participate in these down payment assistance programs must qualify for a home loan, the credit guidelines for the programs are the same as lender guidelines for the specific loan program such as conventional or FHA financing. All programs require borrowers to attend a HUD-approved homeownership education course, says Powers.
“Homeownership programs are not a new subprime loan program, but they do offer buyers a little more flexibility because with a higher down payment, a lower interest rate or a tax credit, they may be able to qualify for a mortgage when they otherwise might have been unable to,” says Chrane.