Are you struggling to save a down payment but dreaming of owning your first home? A down payment assistance program could be a game changer for you. Let's talk about your options!
What Is a Down Payment Assistance Program?
Down payment assistance programs provide financial help to first-time home buyers. These programs are offered by government agencies, nonprofits, and some lenders.
They help buyers by covering all or part of the down payment and closing costs. Down payment assistance programs may also help home buyers make a larger down payment and avoid paying for private mortgage insurance.
What are the Different Kinds of Down Payment Assistance Programs?
There are a few different types of down payment assistance programs available to first-time home buyers:
Grants
Forgivable loans
Deferred payment loans
Low-interest loans
Individual development accounts
Matched savings programs
Grant
A grant is the most valuable type of down payment assistance program because it doesn't require homebuyers to repay the money. It's crucial to inform your lender that you are receiving a grant—or any down payment assistance, for that matter—as soon as possible. Failure to do so is illegal!
Forgivable Loan
A forgivable loan is a type of second mortgage with 0% interest. You don't need to repay it if you meet certain conditions. For example, a home buyer typically must live in the home for several years to have their loan forgiven.
The lender determines the period in which the homeowner must occupy the residence. Some lenders only require living in the home for five years, while others may extend that to 15 or even 20 years.
If you move, refinance your mortgage, or sell your home before the forgiveness period ends, you will have to repay some or all of the loan.
Deferred Payment Loan
A deferred payment loan is another interest-free second mortgage. However, deferred payment loans are not forgivable. The loan will need to be repaid if you take certain actions, regardless of the timing.
For instance, if you move, sell your home, or refinance your mortgage at any point, you will be required to repay some or all of the loan. In other situations, the lender may simply delay or defer your monthly loan payments to a later date.
Low-Interest Loan
A low-interest loan is similar to a deferred payment loan. However, a low-interest loan has an interest rate, and payments must begin as soon as you close on the loan. This down payment assistance program provides first-time homebuyers with a lower interest rate and monthly installments based on their debt-to-income ratio (DTI).
Just be aware that you'll make low-interest loan payments in addition to the monthly mortgage payments on your first loan. This means you'll be paying two mortgage payments each month.
Individual Development Account (IDA)
An individual development account (IDA) is a homebuyer program that helps low-income families by matching a deposit they make in an account with a bank, government agency, or community organization.
The entity you're working with will match your deposit dollar-for-dollar. For example, if you deposit $3,000, the financial institution will also deposit $3,000 into your account. So, you'd have $6,000 of funds to use towards a down payment.
Matched Savings Program
"Individual development account" and "matched savings program" are sometimes used interchangeably. Although their structure is the same, their source of funding is different.
While financial institutions do offer matched savings programs, these types of accounts aren't supported by any state or federal funding.
Who Qualifies for a Down Payment Assistance Program?
To qualify for down payment assistance, you have to be a first-time homebuyer and meet certain income limits, debt-to-income limits, and credit score requirements.
First-Time Homebuyers
Only first-time homebuyers can qualify for down payment assistance programs. However, the phrasing “first-time home buyer” doesn't necessarily mean you never owned a home before.
The IRS defines a first-time homebuyer as an individual who hasn't owned a place of residence in at least three consecutive years before the date of purchasing their next home. This limitation also applies to owning any rental or investment property, even if you didn't live there.
Household Income Limits
Each state and county determine the maximum household income you earn to still qualify for down payment assistance. This can range from $80,000 gross income per year for a one- or two-person household to $140,00 per year. The average income in the area where you currently live and where the new home is located both factor into this.
Another factor to consider is your household size. A two-person household that earns $100,000 per year is considered better equipped to cover a down payment than a four-person household making the same income.
Debt-to-Income Ratio (DTI)
Down payment assistance programs often require that your household debt-to-income (DTI) ratio does not exceed a certain percentage. DTI is the percentage of your total income each month used to pay debts.
On average, a down payment assistance program may require that your DTI ratio is 45% or less. That means if you make $3,000 per month of income before taxes, then you can't spend more than 45% or $1,350 per month of your income on paying off debts.
Credit Score Requirements
To qualify for down payment assistance, you'll typically need a credit score of 640 or more. This is an average estimate, however. Each state and program may have a lower or higher minimum credit score requirement.
How Does Down Payment Assistance Work?
When applying for a down payment assistance program, be prepared to provide income verification, bank statements, and proof of residency. The program provider often requires the same information you need to qualify for a mortgage.
You may also be required to take a class on first-time homeownership and managing your finances. Follow instructions carefully and meet application deadlines to increase your chances of approval.
First-time Homebuyers: Benefit From Mortgage Minds' Expertise
Assistance down payment programs can make your homeownership dreams a reality. Wondering if you might be eligible for a program like this? Contact our experts at the Mortgage Minds Group today to learn more!
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