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.
Types of Assistance at a Glance
Free money is the best-case scenario for homebuyers. In some cases, down payment assistance is a gift that need not be repaid. Grants are the most desirable form of down payment assistance.
Some down payment assistance programs offer money structured as a loan, essentially a second mortgage that helps you get into the house but that must be repaid. Rules vary by program, but typically you'll need to repay the loan when you sell the house.
The most favorable loan terms typically are available to borrowers who put down 20 percent to 25 percent, but there also are plenty of low down payment loans available. FHA loans, for instance, require as little as 3.5 percent down. The tradeoff? Higher private mortgage insurance premiums, which protect the lender in case you default. The VA, USDA and Fannie Mae and Freddie Mac also offer low down payment loans.
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:
LIFT Program Nationwide
The LIFT program is a nationwide down payment assistance initiative by NeighborWorks America and the Wells Fargo Foundation. It provides grants for down payments through NeighborWorks and/or dozens of local nonprofits.
National Homebuyers Fund
Another down payment assistance program, NHF Sapphire, is offered by the National Homebuyers Fund to all buyers - not just first-time purchasers - in California and Nevada. NHF Sapphire gives borrowers a grant of up to 5 percent of the amount of the loan. Borrowers can use the down payment with any type of mortgage, including FHA, VA, USDA and conventional loans.
California Housing Finance Agency
The California Housing Finance Agency provides up to 3.5 percent of a home's value to help first-time buyers cover down payment and closing costs.
Florida Housing Finance Corp.
The Florida Housing Finance Corp. Offers down payment assistance of up to $15,000 through the Florida Hardest Hit Fund Down Payment Assistance Program. Applicants must be first-time buyers - which means the buyer hasn't owned a home in the past three years - in Brevard, Duval, Hillsborough, Orange or Volusia counties. The money is considered a loan forgiven at the pace of 20 percent a year, so after five years, the buyer does not have to repay the loan. Income limits and loan limits vary by county. For buyers in Florida's 62 other counties, the state offers down payment assistance of $7,500 that borrowers must repay, but with no interest.
Texas Department of Housing and Community Affairs
Through the Texas Department of Housing and Community Affairs, Texas assists first-time buyers with 30-year fixed low interest mortgage loans with up to 5 percent of the loan amount going towards the down payment or closing cost.
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.
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.
A Sample of Income Limits by Household Size
|Miami-Dade Home Ownership Assistance program with conventional mortgage. Provides down payment assistance of up to $7,250, depending on income.||$83,020||$94,920||$106,820||$118,580|
|Housing Trust Silicon Valley Closing Cost Assistance. Provides up to $136,000 for down payment.||$110,400||$126,150||$141,950||$157,700|
|New York City's HomeFirst Down Payment Assistance Program. Provides up to $15,000 for down payment and closing costs.||$59,750||$68,300||$76,850||$85,350|
Click on the map below to learn more about the various down payment assistance programs offered by your state.
Why Not Just Keep Your Down Payment? A Buyer's Story
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."
Down Payment Assistance in Rural Areas
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.
USDA loans Don't Require Down Payment
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.
Down payment Assistance for Veterans
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.
Home-Buying Help for Teachers, Firefighters and Other Public Servants
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.
Help for Low-Income Buyers
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 to construction of their own home or someone else's. They also must make a small down payment in exchange for an affordable mortgage. There are no strict income requirements for Habitat's need-based help. 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 PartnershipIn 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 AuthorityIn 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.
Mortgage Programs That Allow Little to No Down Payment
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.
If you're a first-time buyer or otherwise strapped for a down payment, FHA loans are an attractive alternative. You can get an FHA mortgage with as little as 3.5 percent down, and credit score restrictions are lenient. Their main disadvantage? Hefty mortgage insurance premiums. Because borrowers with little equity and poor credit are likelier to default, you'll have to pay extra every month for mortgage insurance, which protects the lender if you don't repay your loan.
Mortgage giants Fannie Mae and Freddie Mac were burned badly in the housing crash, but both have moved cautiously back into low down payment loans.
In December 2015, Fannie Mae introduced HomeReady, a program that allows first-time and repeat buyers to put down as little as 3 percent. In a nod to multigenerational households, HomeReady counts income from household members who aren't borrowers. So if a parent or grandparent lives with you but isn't on the mortgage, that family member's income can be considered in qualifying for a HomeReady mortgage. Borrowers must take a homeownership course.
Freddie Mac, for its part, in 2014 began offering Home Possible Advantage, which also offers down payments as low as 3 percent. Your earnings must be equal to or less than your area's median income, and your credit score must be 660 or higher. First-time buyers must complete a homebuyer class. Fannie Mae and Freddie Mac don't make loans directly, so you'll need to find a lender or mortgage broker that offers HomeReady and Home Possible Advantage loans. Bank of America, for instance, in 2016 partnered with Freddie Mac to offer its Affordable Loan Solution program with down payments as low as 3 percent.
Mortgage Assistance for Struggling Homeowners
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.
Q&A: Tips and Insights From the Experts
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.
What do you see as the biggest challenge for borrowers?
At least in my market in California, the buyer assistance programs are really only viable in certain geographic areas. In California, a family of four needs to make $90,000 to $100,000 a year. In other parts of the country, that's rich, but in California, at that level, you're living paycheck to paycheck. Between the income limits and the debt-to-income limits, you've got this very small window that borrowers will fit into. A lot of times, the borrower assistance programs are very expensive. You're looking at probably a minimum 1.5 percent origination fee. I really implore people to absolutely exhaust all other avenues. Conventional loans will let you go down to 3 percent, and FHA will let you go to 3.5 percent. These assistance programs are good. NHF Sapphire gives up to 5 percent, so on a $300,000 loan, you get $15,000. However, almost half of that money is eaten up in fees.
Lack of funds. The biggest hurdle for most buyers is coming up with a down payment. They think the biggest thing is to get into the house, and then after they exhaust their savings to make the down payment, they don't have anything left for repairs or emergencies. I like down payment assistance because it makes the loan better for us as lenders. The buyer is able to take the money they had saved for a down payment and keep that in reserve.
What are common mistakes you see borrowers make?
Having zero money to their name, and thinking these programs will allow them to own a home. Just not preparing themselves financially for the homeownership part of it. They're trying to scrape and scramble, and they don't have a dime to their name, but they think these programs can let them qualify for hundreds of thousands of dollars of loans. I'll ask people to slow down and save their money. I'd rather that they stay liquid and have some money for moving costs and emergencies. I try to let people know that this isn't an impulse buy. Can you save $500 a month for six months or 12 months? If not, maybe you shouldn't buy a home.
How has the climate changed for down payment assistance?
I'm seeing some constriction going on. It seems like some of these programs are just less available. There's less opportunity, just because of where the market is.
There has always been need for down payment assistance. Prior to the mortgage meltdown, you could get 100 percent financing, and you could get sellers to pay closing costs. It's a different world now. To get a seller to pay closing costs is difficult.
If I'm a first-time buyer looking for down payment assistance, where do I start?
Go through the entire loan-application process. People are afraid of being turned down, so they don't want to give up all of their information. The reality is, the factors on the application determine which programs you qualify for. If you're making a decision solely based on whether somebody is going to give you free money, you're probably not ready. Down payment assistance is a bonus. It shouldn't be the only reason you buy a home.
Down payment assistance programs require that you attend a first-time homebuyer class and provide us with a copy of the certificate that you receive at completion. This certificate is valid for two years, and we advise to enroll and complete as soon as possible to avoid a possible delay in closing once you are under contract to purchase a home. You can enroll on-line at ehomeamerica.org.
Many Americans can't afford a home because of student loans. What advice do you give them?
My suggestion is that instead of having their parents help with the down payment, have the parents help them with the student debt.
The rules recently changed in how we have to qualify borrowers with student debt. There's no doubt that a lot of buyers are now excluded because of the changes. There's a lack of education through high school and college as to how that debt can prevent you from buying a home. In a lot of cases, we'll see borrowers go through a student debt consolidation so they can qualify for a mortgage.