If you dream of becoming a homeowner but find the prospect of coming up with a down payment daunting, then a down payment assistance probably program seems like a delightful idea. Understanding how down payment assistance programs work and recognizing the potential pros and cons can help you decide if they’re an idea worth pursuing as you chase your own dream of homeownership.
What You Need to Know About Down Payment Assistance Programs
Is the lack of a down payment preventing you from buying a home? Down payment assistance programs, or DPAs, could help you make the leap from renting to owning sooner. After all, qualified homebuyers can use these programs for some or all of their down payment, which means they can buy now instead of having to wait until they have managed to save the funds themselves. If you’re considering using one of these programs, what do you need to know about them?
DPAs are run by a number of agencies across the country, and their guidelines vary. As The Mortgage Reports notes, many set similar requirements for borrowers:
- You should be first-time homebuyers. However, a first-time homebuyer is defined as anyone who hasn’t owned a home in three years.
- You must have a low or moderate income.
- You should plan to use the home as your primary residence.
- The home must be within a targeted census tract.
- You must work with an approved mortgage lender.
- The DPA needs to be used in conjunction with an approved home loan program.
Types of DPAs
How does a DPA work? The specifics depend on the program you choose and the type of assistance that you receive. As Forbes points out, there are several common types of DPAs:
- Grants. Why is a grant the preferred form of DPA? You won’t have to repay it.
- Match savings programs. Sometimes called individual development accounts, these programs allow a homebuyer to deposit money up to a certain amount into a specific account with the understanding that it will be matched by the program.
- Forgivable second mortgage. Some DPAs allow homebuyers to get their down payment by taking out a second mortgage. What makes this home loan special is that it is typically a no-interest loan that requires no payments and will be forgiven if the buyer remains in the home for a specific number of years. Only buyers who move or sell before the period ends will need to repay the loan.
- Deferred second mortgage. Another type of DPA that funds the down payment with a second mortgage, the deferred second mortgage DPA won’t require any payments as long as you are living in your home and paying your mortgage payments. The payments on this DPA come due if you move, sell, refinance, or finish paying off your initial home loan.
- Low-interest second mortgage. A low-interest second mortgage gives you a way to fund a down payment at a low interest rate. However, you will be paying two loan payments.
The Pros and Cons
The advantage of a DPA is obvious. You have a chance to access free or low-cost financing. As for cons, Experian explains it’s wise to read the fine print carefully and be aware of circumstances when you may need to repay these free funds. It’s generally if you move, sell, or refinance. Some programs also come with purchasing limits, so if you’re relying on them, that could impact your choice of homes, especially if you’re shopping in a high-cost market.
How to Apply for a DPA
Could a DPA be the final piece of the puzzle that you’ve been searching for? If you hope to use one, you need to know how to apply. As The Balance indicates, these programs are location-specific, so you’ll need to find the ones that are active in your area. To do so, contact your state and local housing agencies.