Home Buyer Assistance Programs’ Impact on Closing Costs and Down Payment

What are home buyer assistance programs?

Home buyer assistance programs make it easier and quicker for people to achieve their homeownership dreams.

Probably the most widespread of these is down payment assistance (DPA) programs. You may get a grant or loan that covers some or all of your down payment. A few of these programs offer help with closing costs as well.

All these programs are open to everyone but have eligibility criteria that we’ll explore later in this article.

In this article (Skip to...)

• Types of home buyer assistance programs
• Qualifications for home buyer assistance programs
• Home buyer assistance program coverage
• Finding home buyer assistance
• Frequently asked questions

What are the different types of home buyer assistance programs?

There are at least 2,000 (some say 3,000) down payment assistance programs across America. The biggest ones tend to be run by state, city or county governments, and therefore backed by federal funds.

But plenty of others, like private or not-for-profit programs, are out there as well. Due to their abundance, it’s highly likely you can find some that cover the area where you want to buy.

Each DPA program gets to set its own rules regarding the help it offers and the applicants who might be eligible.

The form your assistance might take

While these programs vary by location, below are the most common forms the financial help can take:

1. Grant — Get a lump sum and it’s yours to keep — no strings attached
2. Loan — Take a second mortgage, which you pay back in parallel with your main loan. These usually have very low interest rates
3. Forgivable loan — Typically a “silent” loan with no monthly payments and 0% interest. After a set period, your loan is forgiven and you never have to repay it
4. Deferred loan — Like forgivable loans, these require no monthly payments and charge no interest. But you have to repay the sum borrowed in full when you sell the home, refinance the mortgage or finish paying down your first (main) mortgage
5. Tax credit — If offered, a mortgage credit certificate usually comes with one of the above three. You might save up to $2,000 on your annual federal tax bill even if you don’t itemize deductions. And that could help a lot with your ongoing homeownership expenses

Since grants come with no payback, you’d rather have them over the others, although forgivable loans are also attractive. If your state’s DPA program doesn’t offer these, check to see if another operation where you want to buy does.

Special programs for professionals

Other programs exist that can help groups of home buyers.

For example, the U.S. Department of Housing and Urban Development (HUD) lets buyers in certain jobs buy foreclosed homes at half their market value. “Law enforcement officers, teachers (pre-Kindergarten through 12th grade) firefighters and emergency medical technicians,” are in line for that help, according to HUD’s website.

Additionally, Homes for Heroes offers nationwide home buyer assistance programs to those in health care, law enforcement, education, firefighting, EMS and military professions.

Those are just a couple of examples. Further, some city governments offer DPA programs to their employees. It’s prudent to search for what programs are available in your target home buying area.

Who qualifies for home buyer assistance programs?

As we mentioned earlier, each DPA program gets to set its own eligibility criteria. While we can’t tell you if you’ll qualify, we can help you know what to look for on your local program’s website.

Income

DPA programs aren’t generally intended to help already rich folk get richer. They’re meant to assist those at the other end of the wealth spectrum achieve their homeownership dreams.

Most programs have income limits tied to the area median income (AMI) where you’ll be buying. You can use this map on Fannie Mae’s website to pinpoint your AMI.

Some programs allow you to have an annual income higher than your AMI, perhaps 120% of it. Others have lower limits of 100% or 80%. Often, the lower your income, the more help you can expect.

Credit score

Some DPA programs want you to have a credit score higher than 620 or 640. But others have lower limits. If you worry about your credit score, learn about how to raise it quickly.

Property value

Almost all DPA programs cap the amount you can pay for a home.

Home price caps vary by area so check your program’s website for the maximum amount you can pay for your next home.

Other criteria

Many DPA programs insist that you:

• Get your mortgage through an approved lender. You can get the list from the program’s website
• Undertake an approved home buyer education course. Again, the website will tell you more

Most DPA programs require you to be a first-time home buyer, although some don’t. But that doesn’t mean that you couldn’t have owned a home before.

In these cases, “first-time” means you haven’t wholly or partly owned a home (had an “ownership interest”) within the previous three years.

What do home buyer assistance programs cover?

While it’s up to your DPA program to decide how much you get, these are the kinds of help you might be offered:

Down payment

Down payment assistance programs help borrowers with one of the biggest barriers to homeownership. How much you get is often described as a percentage of the home’s sale price, perhaps with a cap expressed in dollars.

Some programs are tighter than others but you may well find that you can get the full value of your down payment: 3% for a conventional loan conforming with Fannie Mae or Freddie Mac’s rules; 3.5% for a loan backed by the Federal Housing Administration or another government body.

Closing costs

Closing costs cover the fees, charges and taxes associated with your purchase, including those needed to process and approve your mortgage. These can add up and typically amount to 2%-5% of the mortgage loan’s opening balance.

You’ll find these costs itemized on your loan estimates, which lenders must send to borrowers when they provide a quote. So, you’ll know what you’re getting into.

Most DPA programs leave you to find your own closing costs. However, some do provide financial assistance for those, as well as your down payment. You’ll have to check your local programs’ websites to see what’s on offer where you’re buying.

Of course, if you’ve already saved a chunk of money for your down payment that you no longer need thanks to your DPA grant or loan, you can always divert that to your closing costs.

How to find home buyer assistance programs?

To find your local home buyer assistance programs, begin at the HUD website. The webpage at that link shows a list of states. Click on the one where you want to buy a home.

There are a list of home buyer resources on your state’s HUD webpage, including “assistance programs” under the “buying a home” heading. You’ll likely find your state’s DPA program there, perhaps alongside ones run by your city or county. Click through to their websites too.

If there’s more than one to choose from, read carefully what each program offers. One will likely suit you better than the rest.

Besides the HUD route, run a web search for "[Your city or county] down payment assistance.” That’s just in case HUD’s missing something.

Also speak to real estate agents, prospective lenders and any other real estate professional you can think of to make sure you’re not the one missing something.

Some tribal entities also run DPA programs. So, watch out for those if you’re likely to be eligible.

Applying

Since each DPA program sets its own rules, that also includes the application process.

Some may allow your to apply online. Others might let your download a paper form or ask you to call for one. Some may direct you to contact one of the companies on their list of approved lenders.

If you’re unclear about how to apply (or about anything else), call the number on the website and ask — especially if you’re a first-time buyer.

The bottom line

At worst, DPA programs can slash the time it takes you to realize your homeownership dreams. At best, one can make you up to tens-of-thousands of dollars ($100,000 in New York) better off than if you hadn’t applied.

Talk to a local lender and ask about what programs are available and if you meet their eligibility requirements.

FAQ

What do I need to qualify for down payment assistance?

Each DPA program writes its own rules, so there’s no universal set of eligibility criteria.

But you’ll likely need to have a low-to-moderate income, have a fair (620-640) or better credit score, and be buying a moderately priced home for the area.

How can I apply for home buyer assistance programs?

Search for down payment assistance programs in your state, city and county and visit the programs’ websites. Each should provide instructions for applying.

Fuller guidance for searching for programs is provided above.

How long does it take to get home buyer assistance?

Sometimes, DPA programs run out of funds. If yours does, it will probably give you a number and ask you to wait until more funding arrives.

Once your money is allocated to you, using a DPA program can push back your closing date, though usually only a bit. That’s because it involves an extra step in the mortgage process.