Saving money to buy a house is one of the biggest obstacles for first-time homeowners. You don’t have any built up equity to draw from, and it can be hard to find a home within your budget – not to mention saving for a down payment. Many families struggle to pay the bills so how can you be expected to save for a down payment?
That’s where down payment assistance programs come in. These programs, which include government and non-profit agencies, allow people to learn more about the home buying process while also receiving loans or grants for their down payment.
But are these programs legitimate? How do you find the right one? And are they always a better deal than just saving the money on your own? Read more to see what to look for in a down payment assistance program and what to be aware of before you sign.
Down Payment Assistance – the Details
Down payment assistance can sound too good to be true. People will just give you money to help you buy a house – huh?
But it’s no joke. Down payment assistance can include grants and small loans that encourage more people to purchase homes. Some programs are run through government agencies that provide discounts on your income tax, so you can theoretically use the difference to save for a down payment.
Many of these programs are determined by your location, so ask local realtors and real estate professionals if they know of any. The US Department of Housing and Urban Development also has information on state-wide programs which you can find here. Most also require that you be a first-time homeowner and meet other stipulations.
For example, the California Housing Finance Agency has the California Homebuyer’s Downpayment Assistance Program which pays for up to 3% of the sale price or appraised value (the lower of the two).
The program works with private lenders, who refer qualified borrowers. To apply, you should have pay stubs, bank statements, employment history and previous tax returns.
Gwen M. of Fiery Millennials looked at a down payment assistance program that came with set interest rates based on how much of a grant you applied and qualified for. The bigger of a grant you got, the higher interest rate you paid.
For example, a $10,000 down payment grant came with a 4.5% interest rate and a 1.75% funding fee. Without the grant, she could have gotten a 3.5% interest rate, so Gwen decided to forego the grant.
Many of these grant programs have similar restrictions so it can pay to do the math beforehand and see if you’re better off without the grant. You may also be able to refinance the loan later into a lower interest rate, especially if you gain more equity or your house value increases.
Julie Rains of Investing to Thrive said she had researched a down payment assistance program that matched your down payment if you went through a financial literacy program among other rules.
“You’ve got to meet residency and income requirements, plus save for 10 to 24 months in a dedicated savings account,” she said. “You can qualify for up to $7,500. But to get the funds, you need to take out a mortgage with the participating lender (meaning you can’t shop around for the best rates and terms).”
To determine if a down payment assistance program is right for you, look at the math, see how much you need the extra help and ask lenders to see what options they have.