Down Payment Assistance for New Home Loans: Has it Dried Up?

Down payment assistance, or DPA, got a bad rap from certain kinds of privately-funded programs that allowed sellers to funnel money to buyers of their homes. Last year, a study by HUD concluded that FHA loans with seller-provided DPA (such as the Nehemiah program) were three times more likely to wind up in default than comparable FHA mortgages without seller-funded DPA. HUD also concluded that seller-funded DPA had the effect of artificially increasing home prices. It was found that homes in developments where builders routinely funded the buyers' 3% down payments sold for (not surprisingly) 3% more than those in comparable nearby developments where no such assistance was given.

In addition, HUD officials discovered that borrowers with even a few thousand of their own funds invested in their homes were significantly less likely to default than those with similar credit and income profiles but no such investment. So seller-funded DPA programs were aborted shortly thereafter. However, there is still a need for help for the less-than-rich who want to buy houses, because paying rent each month and saving a down payment is too much of a stretch for many otherwise worthy would-be homeowners. In addition, research by HUD showed that appropriate DPA actually lowers the risk of foreclosure. So it's not going anywhere.

100% Home Loans and DPA: Still Here!

Down payment assistance is not dead. This help can take varying forms, but it's generally a no- or low-interest loan that you don't have to repay until you sell the property. Sometimes, it's a grant that requires no repayment, some combination of the two methods, or a 100% USDA or VA home loan requiring no down payment at all.

How Does Down Payment Assistance Work?

Sometimes you have to be a first-time buyer, have low income, or both, to qualify for down payment assistance. Other programs require you to be a veteran or buy a home in a less populated area (these rural areas encompass much more of the country than most people think). And lots of the time, "first-time" only means that you haven't owned a home in the last three years. It's important to check each program for eligibility details.

Many state and local governments offer down payment assistance too. Idaho's program provides up to $20,000 for qualifying first-time buyers. You have to take a home buying class and meet income guidelines to qualify. In addition to state funding are many county programs. Prince George's County in Maryland offers up a generous $60,000 in assistance for low-income buyers to purchase foreclosure homes. Cities participate too--take Peoria, Illinois as an example. It recently reopened its DPA program, which funds up to 20% of the purchase price of qualifying property, at a maximum of $10,000. Home buyers in designated economic "impact zones" can get assistance even if they aren't first-timers.

Talk with a Mortgage or Housing Counselor

You may qualify for more than one state or local program. And, because they can run out of money, you need to know when you should apply. Federal programs get their money in October, so waiting until January could cost you. And states have different fiscal years--California starts in July and a program could be tapped out by October. A housing counselor (you can find them on HUD's Web site) can tell you what programs are best for you and also when to apply.

How Do You Find Home Loan DPA?

In addition to housing counselors, there are other sources.

  • Mortgage lenders. When you compare home loan quotes, ask loan agents about the types of down payment assistance programs they work with. Loans with down payment assistance can be harder to close, so do yourself a favor and get help from a mortgage lender who is familiar with them.
  • HUD's Web site. The State Information Web page on HUD's site has a lot of resources. Go there and choose "Learn About Home Ownership" for a listing of state, local, and charitable resources.
  • Contact non-profits. If you plan on getting an FHA home loan, the organization must be approved by HUD. If you find a generous organization, check with the HUD home ownership center nearest you (Atlanta, Denver, Philadelphia, or Santa Ana) to make sure that the grant or loan is from an acceptable source.

Down payment assistance is widely available across the United States if you know where to look. But you need to move quickly, because demand for help with housing has never been higher.