The Advantages of Using Down Payment Assistance

The process of purchasing your new home can be overwhelming. From deciding on the location, what you can afford, how much money will we need, to finding the perfect house, there are many things to consider. One of the most significant factors in purchasing a home is the down payment, closing costs, and the funds needed to purchase a new home. Many individuals struggle with saving enough money to purchase a new home, which is where down payment assistance programs can become very beneficial. In this article, I will discuss the benefits of using down payment assistance programs and how they can make your dream of owning a home a reality by reducing your money out of pocket, reducing your house payment, and creating affordability for you.

Benefits of Down Payment Assistance

The #1 benefit of down payment assistance are the funds available to new home buyers to help purchase their new home sooner or with less money out of pocket. Contrary to what many are told, hear, or believe it doesn't take a 20% down payment to purchase a new home, there are mortgage programs that have minimum down payments of 3.5%, 3.0%, 5%, and a couple mortgage programs that have do not require a down payment!

Other benefits of down payment assistance programs, is that the funds provided are free, they do not require a payment, or will be forgiven over time. Many down payment assistance programs have their own interest rates, the interest rates for these programs are generally lower than the current market rate. If you can provide your own down payment some down payment assistance programs will provide an interest MUCH lower than the market interest rates. Down payment assistance is not just for first time home buyers. Down payment assistance can help some home buyers purchase a new home entirely without using any of their own savings!

Types of Down Payment Assistance

There are basically 3 different types of down payment assistance programs, Grants, Bond Programs, and In-House Programs.

Grant Programs: Down payment grants are funds that are provided to a home buyer to help them cover the cost of their down payment. These grants are usually provided by state and local governments, as well as non-profits, and they do not have to be repaid. Grants are usually awarded based on financial need, and you may be required to meet certain qualifications in order to be eligible for a grant. Grant programs are becoming more and more difficult to find and will be more difficult to qualify for as they tend to be more restrictive in the rules and qualification guidelines. But, when you can find a grant program that works for you, take advantage of these programs.

Bond Programs: are also down payment assistance programs that are provided on a local or state level. Bond programs will at times be forgivable over time or they will have a repayment assigned to the funds provided. It is more common to find bond programs that require that you stay in the home for a prescribed amount of time and once that time expires the down payment assistance debt is forgiven. An example would be a 10 year forgivable DPA program, the first 5 years if you refinance or sell the home the entire amount provided to you would be repaid. During the second 5 year period the amount given to you would be reduced by 1/60th over the next 60 months until you there is nothing owed.

In-House Programs: many lenders have their own down payment assistance programs, these in-house programs are mostly used to provide down payment help to home buyers who do not qualify for a Grant or Bond program. For instance many grant and bond programs have guidelines that all borrowers must meet for approval, the in-house programs will have guidelines to encompass more borrowers, lower credit scores, higher debt ratios, or no income qualifying. 

Also, many lenders are not eligible to provide local or state down payment assistance programs, having an in-house program provides them with the ability to do some good with some home buyers.

Understanding Down Payment Assistance

Down payment assistance can come in the form of grants, low-interest loans, and other forms of assistance. The purpose of down payment assistance is to help  home buyers purchase a home with less money out of pocket. Down payment assistance programs are typically offered by state and local governments, as well as non-profit organizations. In addition to helping with the down payment, many down payment assistance programs can also provide assistance with closing costs, such as title insurance and loan origination fees. This can reduce the amount of money a home buyer has to pay out of pocket at the time of closing.

Down payment assistance programs can be an invaluable resource for first-time home buyers and move up buyers, but it’s important to understand the details of the program before applying. For example, some programs require that you meet certain income requirements in order to be eligible for assistance. It’s also important to understand the terms of the program, such as whether the assistance is in the form of a loan or a grant.

When you are considering a home purchase, it is important to research the different types of down payment assistance available, as well as the different mortgage programs that are available for down payment assistance. Depending on your situation and the programs available, you may be able to secure down payment assistance to help you purchase your home.

FHA loans are insured by the federal government, which makes them a great option for buyers with limited funds. FHA loans typically require a down payment of just 3.5%, making them an attractive option for first-time home buyers and those needing down payment help. The borrower qualification for a FHA mortgage is generally much more relaxed than any other mortgage program. Recently FHA lowered their the rate of their required monthly mortgage insurance premium from .85 to .55, this helps to provide a lower house payment and increase affordability. 

Conventional loans, typically require a larger down payment than FHA as well as a higher credit score and have a higher approval standard than FHA loans. Additionally, conventional loans typically have higher interest rates and mortgage insurance rates for lower down payments. Recently, Conventional mortgage programs came out with programs to be in competition with FHA, helping to provide better programs that work very well with down payment assistance. There are two programs in particular work well with DPA programs.

Home Possible and Home Ready are two loan programs offered by Freddie Mac and Fannie Mae, the two conventional government-sponsored enterprises (GSEs) that provide liquidity to the mortgage market. The Home Possible program is available to first-time home buyers and low-to-moderate-income borrowers. The Home Ready program is available to low-to-moderate-income borrowers. Both programs require a down payment of just 3%, making them attractive options for first-time home buyers. Also, the mortgage insurance rate for these programs are for the most part lower than FHA and eventually will drop off your mortgage payment.

VA and USDA loans are two of the more popular loan programs for first-time home buyers and move up home buyers. VA loans are backed by the Department of Veterans Affairs and they require no down payment at all. Additionally, VA loans have more lenient credit requirements than conventional loans and has no mortgage insurance requirement. USDA loans are backed by the U.S. Department of Agriculture and they also require no down payment. USDA loans are bit relaxed about their underwriting guidelines and have very strict debt and housing ratios, but if you can be approved for this mortgage it is far better than FHA. Plus, there is not required mortgage insurance with USDA home loans.

USDA and VA mortgages are my favorite for helping home owners purchase a new home with little to no money out of pocket, since there is no down payment required using down payment assistance will help to pay for some if not all of your closing costs. But, if you want a really low interest rate these two home loan programs are a great way to get a lower house payment when there are DPA programs that provide a very below market interest rate when you don't need the assistance.

Eligibility for Down Payment Assistance

To be eligible for down payment assistance programs, you must meet certain requirements. These requirements vary depending on the program you apply for, but typically include a minimum credit score, income limits, and residency requirements. To be eligible for a down payment assistance program, individuals must typically meet certain income and credit requirements. Income requirements vary depending on the program, but most programs are designed to help low to moderate-income families. Income requirements are generally determine both geographically and/or by the size of the household. Do not be concerned about meeting income requirements as they are much higher in most states than what many would consider as moderate income.

Credit requirements also vary from one DPA program to another, but the one common denominator is that all local and state DPA programs will require a 640 middle credit score or higher from all home buyers. If your credit score is not in that 640 plus range this is when most in-house down payment assistance programs will serve you. For instance I have an in-house program that will allow for a 600 credit score. 

Many down payment assistance programs will also have maximum sales price limitations and will require that your debt to income ratio be within a specific range. These limitations seldom become prohibitive for many home buyers, again this is when a solid in-house DPA program will serve you better.

This is when having a lender/mortgage loan officer very experienced and knowledgeable of all the down payment assistance programs in your area will help you determine the best DPA program to assistance in the purchase of your next new home.

Applying for Down Payment Assistance

If you are going to use a mortgage to finance the purchase of a new home and you want to use down payment assistance in nearly all situations it is the mortgage lender that will have the DPA program available for you or you will need your mortgage lender to make it all happen. You can go to any of the entities and they will assist but eventually you will have to have the work of your mortgage loan officer to make it all work. In most instances your mortgage application is also how you apply for down payment assistance.

It is extremely important that your lender/mortgage loan officer has all the local and state down payment assistance programs available to them, that they know how they work, and have a lot of experience with them. Then it becomes a matter of when you are pre-approved or approved for a mortgage you will also be approved for the down payment assistance. Keep in mind that you may have to take a home buyer's class if you are a first time home buyer to complete the approval, which many are now online.

Common Mistakes to Avoid 

One common mistake that individuals make when using down payment assistance is not fully understanding the terms of the program. It is essential to read and understand the terms of the program before applying. Additionally, individuals should be aware of any restrictions on the types of homes that can be purchased with down payment assistance. If you have a knowledgeable lender they should explain the ins and outs of the program to you, but do your homework and find the DPA program online and double check your lender. 

The other common mistake is not working with a qualified lender. It's essential to work with a lender who is familiar with the down payment assistance programs available in your area to ensure a smooth and efficient process. I mention this again, most lenders are not qualified or approved to work with many of the local or state programs. Make sure you do your homework!

Making Your Dream Home a Reality with Down Payment Assistance

Buying your first home can be an exciting and rewarding experience. However, it can also be overwhelming, especially when it comes to the down payment. Down payment assistance programs are designed to help first-time home buyers overcome this hurdle and make homeownership more affordable. Overall, down payment assistance programs can make homeownership more accessible for first-time home buyers and move up buyers. These programs offer low-interest rates, reduce the amount of money needed for a down payment, and can make it easier to qualify for a mortgage. By understanding the different types of programs and eligibility requirements, individuals can make their dream of owning a home a reality. 

If you are a first-time home buyer and you are looking for down payment assistance, if you are a home buyer looking wanting to see how down payment assistance can provide you with better mortgage options, I can help. Contact me today to learn more about the different types of down payment assistance and mortgage programs available in your area.

BETTER! Use the Down Payment Assistance Pre-Qualification below, it will take only a few minutes of your time. After you submit the information to me I will email you with a detailed pre-qualification with what down payment assistance programs are available to you, how to best use them, how they would work for you, and all without a credit pull. 

Complete the pre-qualification and in 1 to 2 business days you will see how much money you can save, how soon you can purchase a new home, and so much more!

Bob Rutledge Mortgage

Loan Officer NMLS#: 297044

New American Funding 12321 Olive Blvd, ste 150
St. Louis, MO 63141