Down Payment Assistance: In-Depth Guide on Qualifying
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Last updated 03/21/2024 by
Andrew LathamFact checked by
Homeownership is the American dream. But the path to making it a reality can feel more like a nightmare.
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 Loan | Minimum Down Payment | PMI Required |
|---|---|---|
| Conforming mortgage without PMI | 20% | No |
| Conforming mortgage with PMI | 3% | Yes, or you’ll pay a higher rate for LPMI |
| Conforming mortgage with a piggyback loan | 10% | No, but you’ll need a second loan or HELOC |
| FHA loan | 3.50% | No, but you’ll have to pay upfront and annual MIPs |
| VA loan | 0% | No, but you may have to pay an upfront funding fee |
| USDA | 10% | No, but you’ll have to pay upfront and annual MIPs |
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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:
|
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
|
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.
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.
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.
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.
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Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.
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