Down payment assistance (DPA) got a bad name last year when the Department of Housing and Urban Development (HUD) announced that the Federal Housing Administration (FHA) loans with seller-provided down payment assistance were three times more likely to end up in default than other FHA mortgages. The FHA program was halted amid increasing foreclosures and rising concern about borrowers with no "skin in the game." In a recent Business Week article, FHA commissioner David Stevens said that homeowners are more willing to default if they haven't put any cash into their purchases. "If a buyer puts down even a few thousand dollars, it's a lot of money for them," he said. "There's a financial and an emotional commitment to the home that you don't have otherwise."
This is surely a true statement, but what if you're one of those people who would be able to afford a mortgage payment, but finds it nearly impossible to assemble any significant funds for a down payment? For people on the financial fringes, paying rent each month while putting aside funds to purchase a house is a very big financial stretch.
Mortgages with Down Payment Assistance: Gone for Good?
Through DPA programs, sometimes run by nonprofit organizations, a seller used to be able to contribute up to 6% to an FHA borrower for a down payment or closing costs. But don't look for a big return of seller-funded programs any time soon. The FHA discovered that the problem with this kind of assistance is that the real source of the funds often wasn't a charitable organization -- it was the builders and sellers of the homes involved. And when you have a seller paying you to buy a home, it brings up all kinds of questions about what the home is truly worth. In fact, it was discovered that homes purchased under this program sold for (surprise!) two to three percent more than comparable houses outside the program. These inflated prices made the homes more likely to end up underwater and in foreclosure. Despite the efforts of several groups and members of Congress to continue the DPA program, HUD Secretary Shaun Donovan is solidly set against reinstating the program, and with good reason, given concerns about the FHA's shaky fiscal position.
However, that doesn't mean that down payment assistance is dead. It can take several forms, but usually it's a no- or low-interest loan that you only repay when you sell the property. It can also be a grant that you don't have to repay at all, or a combination of the two.
Still Here: HUD-Approved Down Payment Help
You often have to be a first-time buyer, have low income, or both, to qualify for HUD-approved down payment assistance. In many cases, "first-time" just means that you can't have owned a home in the last three years. Be sure to check each program for eligibility details. Many state and local governments are still making down payment funds available, but these programs can run out of funding fairly quickly. You should move fast to secure your funds early in the year.
Idaho's state program is typical: it provides up to $20,000 for qualifying first-time buyers through its Idaho Housing and Finance Association. You have to meet income guidelines and take a home buying class to qualify. Beyond the state level there are county programs. For example, Prince George's County in Maryland offers low-income buyers up to $60,000 in assistance to buy foreclosed homes. Cities participate too: The city of Peoria, Illinois just reopened its down payment assistance program. It provides up to 20% of the purchase price of the property, with a maximum grant of $10,000. You have to be a first-time homebuyer unless you buy in certain areas, and homebuyers in certain economic development "impact zones" are allowed to apply for assistance even if they're already homeowners.
In many areas, there may be several programs available from different state and local governments. If you don't qualify for one program, you might for another. At the federal level, there are still zero-down payment programs available, so if you can qualify for those, you wouldn't even need down payment assistance. The most widely used down payment assistance program is the VA home loan, for veterans and active military personnel, and the USDA loan, which can be used to purchase property in designated rural areas. "Rural" covers a lot more territory than you think -- even suburbs of cities -- so it doesn't hurt to check before you assume your home wouldn't qualify.
How Do You Find Mortgage Down Payment Assistance Programs?
There are several avenues for locating the down payment assistance programs that are out there.
- Check with mortgage lenders. When you shop for a home loan, ask the loan agent about the types of down payment assistance programs they work with. Many loan officers don't offer them or don't know much about these programs so it is a good idea to do some research before hand (check state housing finance agencies, county government sites, etc.). Loans with down payment assistance can be harder to close, so do yourself a favor and get help from a mortgage lender who is familiar with them.
- Search HUD resources. Go to HUD's State Information Web page, choose your state, then select "Learn About Homeownership." That will bring up a listing of state resources, and often county and city resources too.
- Contact charitable organizations. There are still organizations providing down payment assistance. Keep in mind, however, that if you plan on using FHA financing for your mortgage (and with a low or zero down payment, FHA is your best shot at getting the lowest mortgage rates), the organization has to be one approved by HUD. You can get its roster of approved organizations by checking with the home ownership center nearest you (Atlanta, Denver, Philadelphia, or Santa Ana).
Down payment assistance is still available across the U.S. The challenge is qualifying and grabbing it before the money runs out. The earlier you make your move, the better your chance of getting the help you need.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.