Perhaps the single biggest obstacle to home ownership is coming up with enough money for a down payment, closing costs and cash reserves. While some loan programs don’t require a down payment, such as the VA and USDA programs, others do. For example, FHA loans ask for a minimum down payment of just 3.5 percent of the sales price.
While that may not sound like very much, and it’s certainly a lot less than 20 percent down, 3.5 percent of $300,000 is still $10,500. This is on top of closing costs and cash reserves. First time buyers save money each month to go toward a down payment. But there are Down Payment Assistance Programs available in most areas. Where do you apply for down payment assistance and how do these programs work?
Down payment assistance can come in the form of a grant. A grant is actually free money. It does not have to be paid back. Most such grant programs do ask the borrowers to own the home for at least three years after at which point the grant is forgiven. A grant is typically reserved for first time home buyers and lenders will independently verify first time status.
Although the lender will ask if someone is a first time buyer, the existence of a mortgage showing up on a credit report will also be dated. However, if the mortgage is more than three years paid off, some grant programs consider the applicants to be first timers. Grants have no monthly payments during this period.
Down payment assistance can also be in the form of a second mortgage. A second mortgage is a loan that is recorded and subordinated to an existing mortgage. The existing mortgage is the one that finances the home. A down payment assistance second lien can carry a very low rate or even no rate at all. At the end of a specified period, typically three years, interest can accrue, and payments are due. Like a grant, such programs also require the borrowers be first time buyers.
Down payment help can come as a tax credit. A tax credit, commonly referred to as a mortgage credit certificate, or MCC, reduces the amount of income tax someone pays which in effect increases monthly income. Tax credits are typically issued through state and local governmental agencies. It’s the mortgage company that can provide a list of providers. This is something you want your lender to help you with.
How much money will you need? Your loan officer will provide you with an estimate regarding how much you’ll need to come to the closing table with. This is also depending upon the type of loan program you select, other financial resources and any assistance from the mortgage company. While the mortgage company won’t typically offer the program and service the loan, the mortgage company can help out with closing costs which would then funnel more money toward a down payment.