Owning a home is a dream for many, but the reality of saving for a down payment can be daunting. A hefty sum of money is required upfront, often causing potential homeowners to feel overwhelmed and discouraged.
This is where down payment assistance programs (DPAs) come into play, helping make the dream of homeownership come true. However, like any other financial decision, there are pros and cons to consider regarding DPAs.
In this blog post, we will explore the challenges aspiring homeowners face, the potential benefits of down payment assistance programs, and the drawbacks that need to be considered before making a final decision.
By understanding the complexities of these programs, you can make an informed choice about whether DPAs are the right solution for your journey toward homeownership.
What is Down Payment Assistance?
Down payment assistance refers to any subsidy that can help a home buyer with the down payment on a house. The money doesn’t have to be repaid, but certain qualification requirements must be met to receive it.
You’ll need to find a government program or nonprofit organization to get down payment assistance. Generally, down payment assistance programs are only open to first-time homebuyers and low-income homebuyers.
Some programs offer grants or loans, while others offer home buyer tax credits.
Who Can Get Down Payment Assistance?
There are several programs available, and each has different qualification requirements.
The U.S. Department of Housing and Urban Development (HUD) offers a few down payment assistance programs. One example is the Good Neighbor Next Door program. This program is open to teachers, police officers, firefighters, and EMTs. It offers a 50% discount on the list price of a foreclosed home.
Several state and local programs offer down payment assistance. These programs generally have income limits and other requirements that you’ll need to meet to qualify.
The Pros of Down Payment Assistance
The obvious pro of down payment assistance is that it can help you come up with the money for a down payment. This can be a huge help if you don’t have the cash. You can purchase a house, stop paying rent, and build equity earlier.
Another pro is that down payment assistance can help you avoid paying private mortgage insurance (PMI). You’ll need to pay PMI if you don’t have a 20% down payment, and mortgage insurance will make your monthly payments more expensive.
The Cons of Down Payment Assistance
One of the biggest cons of down payment assistance is that it’s hard to qualify for these programs. The qualification requirements are often strict and can be difficult to meet.
Another con is that you may not be able to get the full amount of money you need for a down payment. This means you’ll still need to create some cash on your own.
Down payment assistance can also come with strings attached. Some programs require you to live in the house for a certain amount of time before you can sell it. Others may have income limits or credit score requirements, making them even harder to qualify.
Finally, qualifying for a down payment assistance program can take a while. If the down payment assistance program falls, your financing can fall through, making your entire offer fall through. And you still need to come up with enough for your closing costs.
Seller Financing and Down Payments
Up until now, we’ve been talking mostly about conventional lending. It should be noted that if you’re trying to purchase a house directly from a seller through seller financing, all bets are off; you can do whatever the seller lets you do.
The same is true if you’re trying to purchase a house through a land contract, lease option, or rent-to-own agreement.
In these situations, it’s up to the seller to decide how much money they require for a down payment and what other terms they’re willing to offer.
But there are some significant downsides to brokering this kind of deal. Seller financing tends to be used by those who don’t traditionally qualify. And because of that, it usually comes out firmly on the seller’s side. If you default, you might not have any equity or limited equity-all that money could go to waste.
Seller financing can be a good option for those who won’t qualify for any other type of loan, those with bankruptcies, bad credit, and no down payment. But because these types of contracts are so tricky and frequently one-sided, you will need a solid real estate agent or real estate attorney to review the documents and discuss them with you.
Can You Get a Loan for a Down Payment?
Well, okay, the answer is technically yes and no.
Nearly all loan products will not let you take out a loan for a down payment. But there’s a bit of a loophole.
Most lenders don’t go back any further than three to six months, nor do they care where your money came from six months ago. So, if you took out a personal loan for $20,000 today and kept that in your bank account for six months, they probably wouldn’t question it-you could use it for a down payment.
The caveat is they would see that personal loan on your credit score, and you would need to still qualify for the mortgage with that personal loan calculated into your debt-to-income ratio. But at that point, you’d have been paying that loan successfully for six months.
Note that this is a very roundabout way to take out a loan for a down payment, and it isn’t advised. It’s not fraud; the money will have “aged” in your account and become yours.
There are other ways to take out a loan, too. Some conventional lenders let you take out a piggyback loan, a secondary loan for your down payment. Other lenders will let you take out a loan from your family and friends for your down payment. The confounding factor will always be that you must qualify for both loans simultaneously; you need a good enough debt-to-income ratio to carry both loans.
Alternatives to Down Payment Assistance Programs
If you don’t think you’ll be able to qualify for a down payment assistance program, there are a few other options to consider.
Get a Gift from a Family Member
One option is to ask a family member or friend for a gift. If they can help you, make sure you get the money in writing and that they sign a gift letter. This will show your lender that the money doesn’t need to be paid back.
Honestly, this is almost always the best option. If you have family that can give you your down payment, there’s nothing saying that you can’t repay them back-just that you aren’t obligated to.
Use a Low Down Payment Loan Program
Another option is to look for a low-down payment loan program. Some conventional loans only require a 3% down payment, while FHA loans require a 3.5% down payment. Several government-backed loans offer even lower down payments. The better your credit score, the more options you’ll have.
Or, Just Put Less Down
Consider spending less if you’re struggling because you want a larger down payment. You’ll have a higher loan balance, and your monthly payments will be higher, but it can help you get into a house faster.
Sell Something of Value
Consider selling a second car or even just holding a garage sale. The reality is that a 3.5% down payment isn’t too hard a target to meet-you might quickly realize that just the unused electronics in your home could get you to that number.
Lower Your Target
Maybe you don’t have the down payment for a $400,000 house. But you might have the down payment for a $150,000 condo. It’s best to get into the real estate market if you can. You will build equity that you can use toward your next house. Be realistic about how much house you can afford.
Remember that you need to consider both your down payment and your closing costs. It’s best to purchase a house if you’re comfortable with your down payment and closing costs—owning a house costs money. Still, it’s worth trying if you can easily qualify for a payment program.
Conclusion: Do You Really Need Down Payment Assistance?
Those are the pros and cons of down payment assistance.
Down payment assistance can be a helpful way to buy a house, but it’s not right for everyone. Research the programs thoroughly and understand the qualifications before you apply.
Many first-time homebuyers think they need more down than they do. There are programs for 0% down if you’re willing to live in a rural location. While a good down payment assistance program can help you, they tend to be difficult to qualify for and unpredictable.
Your real estate agent can advise you whether a down payment assistance program could be a realistic option.
Bottom line: Use down payment assistance if you need to—and if you have time to spare. But it’s probably better to look into a low-down payment loan.
The most significant advantage of a small down payment is that it allows you to buy a house sooner. You may be sick of renting if you’re a first-time home buyer. The disadvantage is that you’ll have a higher loan balance, and your monthly payments will be higher.
You shouldn’t make a down payment if you’re not financially ready… or if you can get a 0% down loan, the money would be better off spending elsewhere. Consider all financial factors when calculating your desired down payment.
It may be that it’s better, for instance, to pay off a credit card or student loan and improve your credit report than to make a bigger down payment.
As mentioned, the primary disadvantage of a small down payment is that you’ll have a higher loan balance, and your monthly payments will be higher. You may also have to pay Private Mortgage Insurance (PMI) if your down payment is less than 20%.
A small down payment may also make it impossible to get a conventional loan; you may need a VA loan or USDA loan instead.
A bigger down payment can help you qualify for a house and reduce your monthly payments. But putting too much down can hurt you, as you lose the opportunity value of that cash. Talk to your financial advisor.