What Is a Down Payment Assistance Program?
These programs offer some form of financial help to home buyers who don’t have a lot of money to put down when buying a house. They are often referred to as “DPA” programs, or DPAPs, for short.
There are several different kinds of down payment assistance programs. Some are offered by housing-related nonprofit organizations, while others are managed by state or local government agencies. Most of them include partnerships with select mortgage lenders.
Three Common Types of Assistance
How does down payment assistance actually work? While these programs are offered by many different organizations, they usually fall into one of three categories:
1. Down payment grants: A grant is different from a loan in the sense that it doesn’t have to be paid back (if certain conditions are met). Down payment assistance grants are funds that the home buyer does not have to repay as long as he or she occupies the home for a certain period of time. At least, that’s usually how they work. Occupancy is a common requirement associated with down payment grants. But the specific rules and requirements can vary from one program to another.
2. Second mortgage loans: This is the most common form of down payment assistance program available these days (as of summer 2017). The primary or “first” mortgage is applied to the purchase price of the house, with a second loan that covers the upfront investment. As with down payment grants, stipulations for second mortgage loans can vary widely depending on the agency that offers it. Many of the second loans offered by state and local housing agencies have very low interest rates – or even zero interest. It’s also common for the payments to be deferred for a certain period of time. In some cases, the loan is completely forgiven once a certain number of years has passed.
3. Tax credits: Some housing finance agencies and government organizations offer mortgage credit certificates to home buyers who meet specific requirements. Strictly speaking, it’s not a down payment assistance program, like the two mentioned above. But it can reduce the home buyer’s tax burden and free up additional money for the down payment and closing cost expenses.
In some cases, the grant or second loan will be offered along with a primary mortgage loan that is offered by a partnering lenders. They’re usually 30-year fixed-rate mortgage loans, since that’s the most stable and predictable financing option for borrowers.
Some DPAs Are Limited to ‘First-Time’ Buyers
Some down payment assistance programs are limited to first-time home buyers, while others are more broad in nature. But the exact definition of a “first time” buyer can vary from one program to the next.
In some cases, eligibility might be limited to people who have never owned a home in past. Other times, the down payment assistance program might be offered to people who haven’t owned a home within the last three years. So the precise definition of a first-time buyer might be narrow or broad, depending on the agency that is offering the program.
Counseling, Size Limits, and Income Requirements
Educational counseling requirements are another common feature of down payment assistance programs. This means that the home buyer must receive some form of counseling or training from an approved counselor or agency. The training topics can vary, but they usually relate to mortgage finance and home buying. Counseling sessions are often brief and, in many cases, can be completed within a few hours.
With many down payment assistance programs, there are usually limits to the purchase price and/or loan amount. A lot of times, the agency offering the program will use median home values to set these limits.
Income restrictions are also common. For instance, if a program is geared toward low- to moderate-income home buyers, it might limit the borrower’s income to 115% of the median home value in the area (a common threshold). That’s just one example of how these limits might be set. But it can vary from one down payment program to the next.