FHA Down Payment Assistance: Your Guide to Homeownership
Down payment assistance programs (DPAs) are tools to help buyers afford homeownership. First-time and lower-income buyers who are struggling to come up with the minimum down payment needed to qualify for a mortgage can use these programs to help bridge the gap. Down payment assistance is usually provided as a grant, forgivable loan, or matched savings program. However, amounts and terms vary widely.
Can You Get Down Payment Assistance with an FHA Loan?
While there is no official Federal Housing Administration (FHA) down payment assistance program, homebuyers can use DPA programs that are available at national, state, or local levels.
The first step is meeting FHA loan requirements for borrowers. While more flexible than other mortgages options when it comes to debt-to-income (DTI) ratios, FHA loans still generally require a credit score of at least 500 with a down payment of 10% or more. Borrowers with scores above 580 may be able to put down just 3.5%. By combining a lower down payment with down payment assistance, borrowers may increase their chances of getting a home.
How Does FHA Loan Down Payment Assistance Work?
For most borrowers, the biggest hurdle is discovering where to find down payment assistance programs. There is no "central" DPA program. Your real estate agent may be able to help you find local providers. The Department of Housing and Urban Development (HUD) also operates a directory of DPA providers. Some employers offer assistance and buyers who work in certain professions may also be eligible for the funding. Finally, it's important to ask your lender about the types of DPA programs they accept when approving mortgages. Once you identify a program that's appropriate for you, you can follow the application process.
FHA Down Payment Assistance Requirements
Each down payment assistance program has its own list of qualifications for applicants. Below is a look at some common ones.
- You must be a first-time homeowner. However, many programs accept anyone who hasn't owned a home within the prior three years. There are also some waivers in place regarding the type of home or conditions of ownership. For example, someone who lived in a home without a permanent foundation, owned a home that wasn't up to code, or experienced hardship can sometimes qualify.
- You must have a program-specific minimum credit score. While DPAs often mirror FHA credit score requirements, it's not a given.
- You qualify as a low-income or moderate-income household based on pay stubs, W-2 forms, 1099 forms, tax returns, or bank statements.
- You're willing to take a homeownership course. While not always standard, these courses are designed to help you prepare to handle the responsibilities that come with homeownership. In some cases, a certification process is also required.
Types of Down Payment Assistance Programs Used with FHA Loans
Below are some common forms of down payment assistance:
- First-Time Homeowner Grants: A grant is a form of down payment assistance that doesn't need to be paid back.
- Low-Interest Loans: DPA loans generally have lower interest rates than other loans. With repayment starting after your closing date, low-interest DPA loans often don't count against debt-to-income ratios.
- Deferred DPA Loan: These loans allow buyers to borrow down payments at low or 0% interest rates.
- Forgivable Loan: These loans can turn into grants when certain conditions are met by the borrower. For example, you may be required to keep a home as your permanent residence for a number of years.
- Individual Development Accounts (IDAs): Select lenders offer state-funded IDAs that match the savings of low-income families to help them purchase homes.
- Matched Savings: Matched savings programs follow the same format IDAs. However, they use lender-provided matching instead of state-funded matching.
- Employer Assistance: Some employers offer loans that turn into forgivable loans/grants to homebuyers if they work at the organization for a certain number of years.
Where Can You Get Down Payment Assistance with an FHA Loan?
Down payment assistance programs are available from a number of different sources. Eligibility and availability can vary based on buyer credentials and a home's location.
Local Programs
Local programs often offer grants to first-time or low-income homebuyers. To see what's available, check with your state's housing finance authority.
HUD Database
HUD works with a roster of approved organizations offering mortgage assistance. The organization also runs a state-specific directory of resources for homeowners.
Lenders
Lenders sometimes accept buyers who will be using DPA from approved programs. Another alternative offered by some lenders is a loan that can be used toward a down payment. When repayment begins, the loan requires a separate payment on top of the standard mortgage payment.
Employer Assistance
While uncommon, some employers do offer down payment assistance as a benefit. Generally, an employee must remain employed for a certain period of time in order for a loan to be fully forgivable. In other cases, the benefit may be a deferred loan.
Types Of Down Payment Assistance Loans and Programs
Down payment assistance programs vary greatly. While some programs pay grants as lump sums, others involve forgiveness or deferment.
Grants
First-time homebuyer grants can help an aspiring homeowner produce a down payment. Major grant programs for qualifying borrowers are generally administered by a state's housing department. DPA grants can also often be used to cover closing costs.
Forgivable Loans (At 0% Interest)
A 0% interest rate forgivable loan is one that doesn’t charge interest. As long as a homebuyer is making their payments, they are eligible to have a percentage of the loan forgiven every year until they achieve full forgiveness.
Deferred-Payment Loans (At 0% Interest)
This option allows a buyer to obtain a second mortgage with deferred payments. As part of the arrangement, the second mortgage is taken out for the amount needed to cover a down payment. Repayment doesn’t begin until the borrower sells, refinances, or pays down the original loan. Unlike other options, deferred-payment loans cannot be forgiven.
Low-Interest Loans
Lenders and other organizations sometimes offer low-interest loans designed to be taken out at the same time as a primary mortgage when buying a home. The funds from this loan can be used to cover the down payment. Low-interest loans for down payments are generally paid in installments alongside mortgage payments.
Matched Savings Programs
A matched savings program allows a borrower to deposit money into a financial account in order to have the funds matched. The combined total is then used for a down payment. Matched savings programs are offered by government agencies, community organizations, and some banks.
Down Payment Assistance FAQs
How long does it take to get down payment assistance?
Every program has its own timeline. The period from submitting an application to receiving funding approval can be anywhere from a few weeks to several months.
Will down payment assistance affect my closing timeline?
In some cases, the extra paperwork and communication required between the assistance program and your lender can result in it taking longer to close on your new home. Working with an experienced lender is one of the best ways to ensure the process moves along smoothly.
What do I need to qualify for down payment assistance?
Each program has its own requirements. However, most programs for first-time and lower-income borrowers generally require applicants to be considered first-time homebuyers or earn less than a certain income threshold. You must also generally meet all FHA loan requirements.
How can I apply for down payment assistance?
Start by researching programs for down payment assistance that are available in your state or city. Next, look at your credit score, income, and debt-to-income ratio to determine your eligibility for different programs. You will then need to apply to each program separately using the application or process required.
