In addition to qualifying for a mortgage, a big hurdle in the home-buying process is coming up with the funds for a down payment and closing costs. States and local governments may offer such assistance to encourage homeownership in specific areas. Nonprofit agencies offer similar programs. Qualification requires income verification and an acceptable credit score.
Down payment assistance programs are separate from the mortgages themselves. You'll have to qualify for a primary mortgage first before you can qualify for any help with the down payment.
The federal Department of Housing and Urban Development doesn't provide direct down payment assistance, but it does provide grants to state and local organizations for that purpose through its HOME Investment Partnerships Program and the Community Development Block Grant Program. HUD also works with nonprofits and state and local government agencies to maintain a roster of approved nonprofits and nonprofit instrumentality of government secondary financing providers. Nonprofits must be approved by HUD to offer secondary financing, such as a no-interest deferred loan. Gifts from nonprofits that help homebuyers make their down payments and that don't have to be paid back do not need HUD approval.
Financial institutions may also offer funds for down payment assistance in certain areas, providing neighborhood stability and promoting homeownership through nonprofits and private lenders. For example, Wells Fargo's program is dependent on the city, but anyone who makes less than 120 percent of the area's median income may qualify.
Government down payment assistance programs operate on a state and local level and can take different forms:
- Deferred loans: Most assistance programs take the form of deferred loans, which have to be paid back eventually, although usually not until you sell the house or pay off the mortgage. For example, the Maryland Mortgage Program provides help through its Down Payment Assistance program. This offers a zero-percent loan of up to $5,000 to those who qualify for a mortgage through the program. You'll pay the loan back only after you've completed your other mortgage payments, or when you refinance, sell or otherwise vacate the home.
- Grants: A grant for a down payment assistance doesn't have to be paid back. You may need to occupy your home for a specified period of time in order to avoid repayment.
Although specific requirements vary by location, general guidelines for qualification include:
- Income: Programs are generally available to low to moderate income buyers, although specific details vary by location. Prospective buyers can qualify for down payment assistance even if they earn up to 120 to 140 percent of their state's median income in some locations.
- Credit scores: In Michigan, you'll need a credit score of 640 to qualify for down payment assistance from the Michigan State Housing Development Authority.
- Residency: You'll likely be limited to a home within a specified area, particularly for programs run by state and local governments. You'll also have to occupy the property yourself -- these programs rarely apply to rental units.
- First-time homebuyers: Many down payment assistance programs are restricted to those who have never owned a home, or who haven't owned a home for a set period of time.
Other conditions may have to be met as well, and some states extend eligibility to other groups. For example, in Orange County, Florida, buyers must complete a homebuyer's education program first and they can't have owned a home in the past three years. In Texas, teachers, firefighters, police, correctional officials and veterans may also be eligible at higher income levels. California extends its program to teachers who otherwise wouldn't qualify based on income requirements.
Every state application is different. For nonprofit sources of down payment assistance, clearinghouse sites like Down Payment Resource can help you determine if you'll qualify for aid and where your likely sources of funding are.
Down payment assistance isn't unlimited. You'll probably have restrictions on the price of the property purchased, or the amount of assistance will be capped at a certain amount regardless of how much the home costs.