Path to Homeownership: Down Payment Assistance and Other Key Resources

Homeownership is an important part of the American dream, but many Americans still struggle with the daunting task of saving for a down payment. The combination of stagnant wages, rising rents and hefty student loan payments simply prevent many would-be buyers from setting aside cash. Thankfully, though, for strapped buyers, there are other options, including low down payment mortgages and mortgage assistance programs backed by state and federal agencies.

This guide is a starting point for buyers who want to own a home but lack the cash to do so in the conventional way.

Nonprofits and state, federal and local governments make available millions of dollars to help middle-class consumers buy homes. But this windfall often goes untapped because homebuyers aren't aware the programs are available. According to a NeighborWorks America survey, 70 percent of U.S. adults said they were unaware of down payment assistance for middle-income homebuyers in their community. It's true you have to do your research to find the money, but a knowledgeable mortgage broker or real estate agent can help you navigate the process.

Here are a few examples of down payment assistance programs available:

Many employers - including Duke Realty, Washington University in St. Louis, the Scripps Institute and consulting firm McKinsey - also offer home buying assistance to employees. Bank of America's Down Payment Resource Center has a database that lets you search hundreds of programs.

For veterans, active-duty service members and surviving spouses, VA Home Loans can help make buying a home more affordable.

Down payment assistance programs are designed to help folks grab their part of the American dream. Qualifying for help requires that you're not too rich (free money for millionaires would be unseemly) but not too poor (after you move in, you've still got to pay the mortgage, plus utilities and repair bills). Down payment assistance programs typically impose income limits, but they can vary widely based on the cost of living in your area.

• In Northern California's high-wage, high-cost Santa Clara County, buyers who make up to $122,245 a year can qualify for the National Housing Foundation's Sapphire program.
• In San Francisco, San Marin and San Mateo counties, the limit is $117,185. For Housing Trust Silicon Valley Closing Cost Assistance Program, the maximum income is $157,700 for a family of four in 2019. That sort of income would be comfortably upper-middle class in some parts of the Midwest and South, but not in a market where the standard three-bedroom home goes for $1 million.
• Even low-cost North Dakota lets borrowers with six-figure incomes qualify for its North Dakota Roots program, which offers down payment assistance.

*Housing Trust Silicon Valley Closing Cost Assistance
**HomeFirst Down Payment Assistance Program

Weary of sharing a rental house with four roommates, Vince Palmeri decided to dive into the housing market. The 28-year-old warehouse manager had saved $7,000 for a down payment, but his loan officer, Deb Holloway of Shelter Mortgage, offered a better idea: Palmeri was eligible for $15,000 through the Florida Hardest Hit Fund Down Payment Assistance Program. Palmeri didn't need much convincing. "That seemed like a better option than spending my own money," he says. The $15,000 loan is forgiven by 20 percent for each year Palmeri stays in the house and will disappear after five years.

The Florida Hardest Hit Fund aid is unusually generous, but it's not widely available. As of early 2016, the $15,000 award was available in only five counties in Florida. Applicants in Brevard County, where Palmeri lives, are limited to annual income of $86,660 and a home price of $316,177. Aside from income and price limits, Palmeri was required to take an online course about homeownership, and he had to fill out a few forms. "It was not difficult at all," Palmeri says. "Most of the paperwork was emailed to me."

The housing affordability squeeze is felt most acutely in big cities such as New York and San Francisco, where homes are scarce and buyers are plentiful. While many down payment assistance programs focus on high-cost metro areas, there also are loan programs for borrowers in rural areas.

If you're looking for a home in a rural area, you might be eligible for a no-down payment loan through the U.S. Department of Agriculture. USDA loans aim to help buyers with low to moderate incomes achieve homeownership in small towns. Incomes vary by area. In Alabama's Cherokee County, for instance, the moderate income guaranteed loan income limit for a USDA-backed loan is $75,650 for a household of up to four people. Even if you consider your neighborhood more suburban than rural, the USDA's boundaries can be broader than you might expect. This tool lets you type in an address to determine if the home is eligible for USDA loans.

The most commonly used USDA mortgage is the Section 502 Guaranteed Rural Housing Loan, a program that offers 30-year loans through private lenders. Similar to FHA and VA mortgages, these loans are insured by the USDA. The government agrees to repay 90 percent of lenders' losses if you default.

Serving in the military isn't the most lucrative career, but there's some consolation. Many down payment assistance programs and loan packages are available for veterans.

For instance, the Pentagon Federal Credit Union Foundation offers the Dream Makers program to help vets afford homes. The credit union requires you to put up at least $500, and it will double that amount, up to $5,000. Borrowers must be veterans or on active duty, first-time homebuyers or have not owned a home in the last three years or have lost your home through disaster or divorce, and not make more than 80 percent of their area's median income. You don't need to be a member of the credit union to qualify.

Veterans gain a valuable benefit in the form of VA loans. For cash-strapped veterans, these mortgages might be the best deal available to homebuyers. VA loans require no down payment, no minimum credit score and no mortgage insurance. To apply for a VA loan, start by finding several VA lenders and comparing their offers.

Teachers, police officers and other public servants can struggle to afford homes in high-cost areas. If this situation describes you, consider the U.S. Department of Housing and Urban Development's Good Neighbor Next Door program, which covers half the cost of a home. However, HUD calls this a "community revitalization" program, meaning the properties eligible for assistance typically are in poor repair or in blighted areas, or both. You must commit to living in the property for three years. In exchange, HUD gives you a "silent second" mortgage that requires no payments. After you stay in the house for three years, the loan is forgiven. HUD lists eligible homes here.

A number of state programs offer assistance to public employees:

• The Texas Heroes program offers down payment grants of 2 percent to 5 percent of the purchase price to public employees, including teachers, school nurses, police officers and jail guards. Offered by the Texas State Affordable Housing Corp., the grants are gifts that don't need to be repaid.
• The CalHFA School Teacher and Employee Assistance Program offers first-time buyers up to 4 percent of a home's value.

Many down payment assistance programs require borrowers to be middle class, but there also is help for those who lack the income to qualify for a loan. Habitat for Humanity is a nonprofit that helps low-income folks build or repair a home and refers to its efforts as "a hand up, not a hand-out." To qualify for home ownership, families must contribute hours towards participation via construction of their own home or someone else's. All Habitat's across the country follow strict guidelines set by HUD with minimum and maximum amounts based on the applicants family size. People should apply to their local Habitat chapter.

Meanwhile, many states and cities also have programs that aim to help low-income borrowers achieve homeownership:

• In Florida, the State Housing Initiatives Partnership
  In Florida, the State Housing Initiatives Partnership provides money for low-income buyers. In New York City, the Housing Preservation & Development department offers down payment assistance for the working poor.

• In Chicago, the Chicago Housing Authority
  In Chicago, the Chicago Housing Authority in 2016 began offering down payment assistance of up to 5 percent of a home's purchase price. That program is open to low- and middle-income buyers, but first-time buyers will have to complete a home buyer education course.

During the housing bubble that inflated a decade ago, anyone could get a loan with no money down. "Liar loans" and mortgages for NINJAs - borrowers with no income, no job or assets - were the rule. But how times have changed. No-down payment loans are mostly gone, and qualifying for a mortgage is much more difficult now. However, there are still loans that allow buyers to get into a home with small down payments.

A flood of foreclosures followed the financial crisis. That spurred the federal government to create programs to keep Americans from losing their homes. The Treasury Department's wide-ranging Making Home Affordable initiative offers a variety of programs for struggling borrowers. The Home Affordable Modification Program, designed for homeowners who bought houses during the bubble and remain underwater, helps borrowers reduce their monthly mortgage payments by adjusting the interest rate on the loan, extending the term and reducing the principal. The Treasury Department says borrowers who modify their mortgages through this program save about $500 a month. Uncle Sam offers an alphabet soup of programs through Making Home Affordable, including one initiative that offers $10,000 in relocation assistance to borrowers who lose their homes to foreclosure.

Another federal program, the Treasury Department's Hardest Hit Fund, provided billions of dollars to 18 states originally designed as a way to help unemployed homeowners. But the Hardest Hit Fund program has morphed, and in Florida, some of the money is used for down payment assistance.

Those who have lost their homes to foreclosure in past years and are now regaining their financial stability, can also find mortgage programs that allow buyers with previous foreclosures, short-sale or bankruptcy on their histories. For example, through the FHA's Back to Work program, those who have suffered a bankruptcy, foreclosure, or other adverse economic event may be eligible for an FHA-insured mortgage if the borrower meets certain requirements.

Scott Schang is a longtime mortgage broker and branch manager at Buywise Mortgage in Anaheim, California.

Deb Holloway is a veteran loan officer, who works at Shelter Mortgage in Melbourne, Florida.