A Complete Guide to Down Payment Assistance

Everything you need to know about down payment and closing cost assistance.

Homeownership is the American dream. But the path to making it a reality can feel more like a nightmare.

Percentage of renters saving for a mortgage downpayment.

For many, the biggest hurdle is the down payment. That isn’t surprising since 20% is considered the minimum down payment if your priority is to avoid unnecessary expenses. 

A 20% down payment can lower your monthly mortgage payments and help you avoid the need for private mortgage insurance. 

But it isn’t always realistic. More than half of homebuyers (52%) of homebuyers put less than 20% down on their home. And 32% of renters don’t own a home because they are saving for their mortgage down payment (source).

What’s more, nearly half of homebuyers with a mortgage use more than one source to cover their down payment—18% rely on two sources and 27% rely on three or more. 

But don’t let that discourage you. There are down payment assistance programs that can help alleviate some of that financial burden. Here’s everything you need to know.

What is the minimum down payment to avoid a private mortgage insurance?

The minimum varies depending on the lender and mortgage program you choose. Here is a summary of the most common options.

Type of LoanMinimum Down PaymentPMI Required
Conforming mortgage without PMI20%No
Conforming mortgage with PMI3%Yes, or you’ll pay a higher rate for LPMI
Conforming mortgage with a piggyback loan10%No, but you’ll need a second loan or HELOC
FHA loan3.50%No, but you’ll have to pay  upfront and annual MIPs
VA loan0%No, but you may have to pay an upfront funding fee
USDA10%No, but you’ll have to pay upfront and annual MIPs

What is down payment assistance?

Down payment assistance (DPA) programs offer loans and grants to homebuyers to help cover down payment and closing costs. Nearly all state housing finance agencies (HFA) provide some form of assistance to eligible low- and moderate-income homebuyers.

Where can you find down payment assistance programs?

There are many organizations that offer DPA programs.

These include:

  • Federal Housing Administration (FHA).
  • U.S. Department of Veteran Affairs (VA).
  • U.S. Department of Agriculture (USDA).
  • City and County Housing Authorities.
  • State Housing Finance Agencies.
  • Non-Profit Organizations and Employers.

Most DPA programs are designed to be used in combination with your primary mortgage product, with the exception of a few states. As such, you’ll likely have to already own a mortgage to qualify.

Some DPA programs offer assistance for any homebuyer who meets the specified program requirements. Others are designed for a specific group of people, such as first-time homebuyers, active military personnel and veterans, or teachers.

You may have to sign up for a particular mortgage product. The majority of DPA programs require you to borrow from an approved lender participating in your chosen program.

What are the different types of DPA programs?

With more than 2,000 DPA programs offered nationwide, the rates, terms, and eligibility requirements vary from one program to the next.

Down Payment Assistance Program Types

  • Second Mortgage Loans. Repaid along with your primary mortgage.
  • Soft Second Loans. Pay back when you sell or refinance.
  • Grants. No repayment needed.

DPA programs are generally structured in three different ways: grants, second mortgage loans, and soft second mortgage loans.

Second mortgage loan

Second mortgage loans are repaid over a set term in conjunction with your primary mortgage. Rates and terms vary by state. In some programs, the rate on a second mortgage will match that of the first while other programs offer more subsidized rates on their down payment assistance loans.

WEIGH THE RISKS AND BENEFITS

Here is a list of the benefits and the drawbacks to consider.

Pros
  • Financial assistance. Enables homebuyers who don’t have sufficient savings to meet standard program requirements to own a home.
  • Increase affordability. Subsidized interest rates can make the housing payment more affordable and increase your likelihood of qualifying for the loan.
Cons
  • Must have a primary mortgage. Most programs have to be used in combination with an existing HFA mortgage product.
  • Funding. Funding is subject to availability.
  • Full repayment. Unlike grants, you need to pay a second mortgage loan in full.
  • Limited eligibility. Due to income limits and other factors, a narrow pool of borrowers will be eligible.

Soft second mortgage loan

Soft second mortgage loans offer a deferred payment schedule. You don’t need to pay unless you sell your home or refinance your mortgage.

Many of these loans are also forgivable over a specified term. For example, the Ohio Housing Finance Agency offers DPA in the amount of either 2.5% or 5% of the home’s purchase price. The loan is forgiven after seven years if the borrower has not sold or refinanced the home.

WEIGH THE RISKS AND BENEFITS

Here is a list of the benefits and the drawbacks to consider.

Pros
  • Financial assistance. Enables homebuyers who don’t have sufficient savings to meet standard program requirements to own a home.
  • Increase house affordability. These loans typically don’t increase the monthly cost of owning a home.
Cons
  • Confusing terms. Soft second mortgage terms are sometimes difficult to understand.
  • Added complexity. In addition to confusing loan terms, this product can add an extra layer of complexity to the loan process.
  • Possible restrictions. Some programs may place restrictions on the transfer or selling of the home.
  • Limited eligibility. Due to income limits and other factors, a narrow pool of borrowers will be eligible.

Grants

Qualified buyers who meet the program requirements will not have to repay the granted funds. As such, DPA grant programs tend to run out of funds before loan programs since those funds are replenished by repayments.

WEIGH THE RISKS AND BENEFITS

Here is a list of the benefits and the drawbacks of using grants to finance a down payment.

Pros
  • Financial assistance. Enables homebuyers who don’t have sufficient savings to meet standard program requirements to own a home.
  • No repayment. Borrowers aren’t required to repay grant funds.
Cons
  • Possible lack of funds. DPA grant programs may run out of available funds more quickly than loan programs.
  • Limited eligibility. A limited pool of borrowers will qualify for DPA grant programs.

FHA and VA Home Loans―Down Payment Assistance

Because part of the home-buying process requires borrowers to have a down payment, many first-time homebuyers find it difficult to save and need assistance. However, the federal government offers two types of home loans that reduce the traditional bank required 10 to 20% down payment, making home ownership more affordable.

FHA (Federal Housing Administration) Loans

Available to most homebuyers with a FICO score of 580 or higher and generally offer a minimal down payment―as low as 3.5%.

VA (Veterans Affairs) Home Loans

Available for qualified veterans, active duty personnel, reservists, National Guard members, and sometimes even to surviving spouses. Generally, there is no down payment unless one is required by the lender or if the purchase price is higher than the appraised price.

Bottom line

There’s more than one path you can take to make your dream of homeownership a reality on a budget you can afford. 

Down payment assistance programs make this possible by creating homeownership opportunities to those who might not have otherwise had one.  

Remember to speak with your lender or realtor and check with federal, state, and city websites to find out about the programs in your area.