What is Down Payment Assistance (DPA)?

When it comes to securing a down payment for your home purchase, it is never too early to start saving. However, if you are strictly relying on your savings, it can take a while to gather enough funds. The good news is there are various assistance programs available, designed to help homebuyers get started on their journey to homeownership that much sooner.

In this article, we will tell you what you need to know about down payment assistance and how it works so you better understand if it is the right option for you.

What is down payment assistance (DPA) for homebuying?

Down payment assistance programs, or DPA, help homebuyers who may not be able to cover the full cost of a down payment when buying a home. They are often geared toward helping first-time buyers or borrowers in need of this kind of financial aid. Though there are some federal programs available, DPA programs often vary depending on your location as they are more commonly funded by state and county government branches.

Some private lenders also have their own DPA loans and grants that their borrowers can access, so be sure to ask your lender if they have any available.

How does it work?

Oftentimes, down payment assistance is provided through grants, loans, or similar types of financial aid. These programs are offered by various entities, including government agencies, private lenders, community organizations, and more.

In order to qualify for most DPA programs, you will have to formally apply to see if you meet the requirements. There is sometimes another qualification that requires you to take a homebuyer education or training course. The amount of funding you will be provided will also depend on the programs you apply for. Some cap the amounts they fund at a specific dollar amount, whereas others base it on a percentage of the home’s total sale price.

How many DPA programs can you use at once?

Homebuyers can use multiple down payment assistance programs for the same home purchase if they qualify. However, it is important to ask your lender and make sure that they allow you to use more than one DPA. It is also worth noting that not all lenders accept or approve all down payment assistance.

What are the different types of DPA programs?

There are five types of down payment assistance you are likely to come across as you research. They include:

1. Grants: A one-time cash fund provided to homebuyers. You do not have to worry about repaying this type of DPA as grants are considered to be gift money. However, it is important to read grant terms carefully before you apply. Some organizations may label their DPA programs as grants, but in actuality, these funds are a second lien or no-interest second mortgage on the home.

2. Forgivable loans: A type of loan or second mortgage that is forgiven (meaning you do not have to repay it) so long as you meet the program’s requirements. This can include living in the home for a specified amount of time and keeping up with your monthly mortgage payments. The loan will likely be forgiven in increments until you reach the end of a set period, at which point it is completely forgiven. However, in the event you decide to move prior to the end period, you will be required to pay back the funds.

3. Low-interest loans: A type of second mortgage, low-interest loan that you are required to pay back. On top of your monthly payments for your main mortgage, you will also repay the DPA loan amount over a period of a few years, plus interest.

4. Deferred-payment loans: Unlike the low-interest loans listed above, deferred-payment loans do not charge you for interest. You also do not have to pay the loan back until you decide to sell, refinance, or pay down your first mortgage. However, this type of DPA is not eligible to be forgiven.

5. Individual development accounts (IDAs) or matched savings programs: These are exceptional savings accounts in which your contributions or deposits are matched by a bank, government agency, or community-based organization. The combined funds are then available for you to use in order to cover the cost of your down payment.

Are there down payment assistance eligibility requirements?

Yes, similar to being approved by your lender for a mortgage, DPA programs also have eligibility requirements you must meet. Though the exact qualifications vary depending on the program you apply for, some of the more common requirements may include:

• A minimum credit score of 620

• Income that does not exceed a specified limit

• The home’s location (must reside in the program’s designated locale or county)

• You are a first-time homebuyer (meaning you have not owned a home in the last three years)

• Attending an educational class or course on homebuying and finances

Some down payment assistance will also require you to live in the home you buy for a certain amount of time. This timeframe can range anywhere between three and ten years.

How to find DPA programs

There are no consolidated databases for all of the available down payment assistance programs. The best way to start your research is by looking into your local housing authorities, housing assistance non-profit organizations, or your state’s housing finance agencies. Many cities and counties also list their available DPA programs online, so be sure to check out your municipality’s website for information.

The U.S. Department of Housing and Urban Development (HUD) lists various homebuying programs by state on their website. You can also ask your lender if they provide any of their own assistance programs or provide a list of DPAs that they accept.