There are plenty of down payment assistance programs available for home buyers and these programs are a great option for those that qualify. Down payment assistance programs can be either government funded programs or privately funded programs and they generally are offered in most major real estate markets across the country. In the article that follows we will provide a complete guide to down payment assistance programs so you can see if these programs might be a fit for your upcoming home purchase.
What is Down Payment Assistance
When buying a home, the down payment is equal to a percentage of the home’s purchase price. There are several low-down payment loan programs that allow you to get into a home for as little as 3% down for first time home buyers. A down payment assistance program will provide the funds needed for the down payment on a home for borrowers that qualify.
Saving for a down payment is one of the biggest hurdles to buying a home so these first-time home buyer assistance programs are a great option for those trying to buy a house.
Who Qualifies as a First Time Homebuyer?
By definition, the U.S. Department of Housing and Urban Development (HUD) defines a first time home buyer “as an individual who has not had any ownership in a principal residence during the 3-year period ending on the date of purchase (closing date) of the property”.
And in most cases, to qualify to receive down payment assistance, you can not own any rental or investment properties and still qualify for these first-time home buyer down payment assistance programs.
What are the Down Payment Assistance Programs Guidelines?
Generally, to have access to these no down payment mortgage programs, borrowers need to meet minimum mortgage loan requirements in the areas of credit, income, and debt-to-income (DTI). The organization that operates the program will be responsible for setting their own guidelines, so you need to become familiar with the differences from one program to another when you are ready to buy.
While there are differences from one program to the next, the requirements to qualify for down payment assistance will fall into a similar range. If you are hoping to buy a home in the upcoming 6 – 12 months or more, my recommendation is to aim for the following financial goals.
Credit: most down payment assistance programs will have minimum credit score requirements. A good target to set for your credit score to qualify for these no down payment mortgage programs is a credit score of 640+. Obviously, the higher credit score the better but this is the minimum level you will want to be at when evaluating loan programs.
Income: most of the down payment assistance programs will have income limits of some sort that may define the maximum income you are allowed to earn in order to qualify for a particular program. Read the program guidelines to learn your programs requirements, or work with your loan officer so he/she can assist you with your programs qualification criteria.
Debt-to-Income (DTI): most down payment assistance programs will have a DTI maximum of 45%. My recommendation is to set a goal to have your debt-to-income (DTI) ratio at 45% or less as you prepare for your upcoming home purchase. To learn more about the DTI ratio, what it is, and how to calculate it, read our article HERE to learn more.
Types of Down Payment Assistance
Most of the first-time home buyer down payment assistance loans will come in the form of either grants, forgivable loans, or deferred payment loans. The programs can be either public or privately funded and this mostly depends on the local real estate market and your state’s appetite to assist first time home buyers with homeownership.
Lets take a look at some of the different types of down payment assistance:
Grant: a down payment grant is the most desirable type of program to find and they still do exist but they are harder to find today. The requirements to qualify for down payment grant programs are pretty strict for potential home buyers and there are also normally very tight income limits to be accepted in to these programs.
Forgivable Loan: this is the next most favorable type of home buying assistance because the down payment contribution is a grant to the home buyer and doesn’t need to be paid back. In the case of a forgivable loan, a second loan is placed on the home and as long as the monthly mortgage payments are made on time and the homeowner lives in the home for the required timeframe the loan is forgiven.
However, if the homeowner sells the home or refinances the loan before the loan term is up then the homeowner may be subject to paying back some or all of the down payment assistance loan. Consult either your loan officer or the loan servicer for more details about your specific loan program.
Deferred Payment Loans: these down payment assistance programs normally will cover the amount needed for the down payment on a home but will require re-payment when the buyer moves, sells, or wants to refinance the mortgage.
Most of the time the funds are provided via a second mortgage lien that may not require any payment while the homeowner lives in the home. When the homeowner does want to sell or refinance the mortgage, re-payment funds will normally come from the equity built up via home price appreciation.
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