Risk of using down payment assistance

Are There Any Risks With Using Down Payment Assistance?

Is Down Payment Assistance A Good Idea?

I’m sure you’ve heard it from parents and mentors your whole life…”If it sounds too good to be true, it probably is”.  So then, how are we supposed to look at the mouth of the gift horse of downpayment assistance programs?  Is there reason to be skeptical?  Is there a “catch?”.

Pros and Cons of Down Payment Assistance

As with anything, you should do your homework and gather all of the information you can, so that you can make an educated and informed decision.  There is always risk, and there is definitely reward.

Pros of Down Payment Assistance

  • Makes a home more affordable
  • They may not require you to make a down payment
  • They may offer an interest rate discount (sometimes 0%)
  • They may help you get a loan you otherwise couldn’t have gotten
  • They may eliminate private mortgage insurance

Cons of Down Payment Assistance

  • They may be hard to qualify for
  • They will likely slow down your closing
  • Those that require repayment could cause financial stress later on
  • They may require you to live in that home for “x” period of years

Your loan officer’s job is to present you with all of the facts, and all of your options, so that you can decide for yourself if the reward outweighs the risk.

If it sounds to good to be true…..

Types of Homebuyer Assistance

Homebuyer assistance comes in many flavors.  When we say homebuyer assistance, most of these programs can be used for either down payment, or closing costs, and sometimes they can only be used for one or the other.  It is important that you understand how the assistance can be applied to your home buying costs so that there are no surprises at the closing table.

The most common types of homebuyer assistance programs are:

  • Silent Second Mortgage
  • Homebuyer Grant

Silent Second Mortgage

These programs may or may not have an interest rate tied to it, but never a monthly payment.  The reason why they are called “silent second” mortgages is that there are no payments due for the life of the first mortgage in most cases.  These assistance programs do create a lien against the property, and usually require that you pay them off if you sell, or refinance the home in the future.

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Homebuyer Grant

Grant programs will not create a lien against the property and are not expected to be paid back.  There is no interest rate, and no payments associated with a grant as well.

How Does Down Payment Assistance Work?

There are many types of downpayment assistance available.  Many Cities, and Counties will offer downpayment programs.  Most States will have a State Housing Finance Agency that will offer assistance programs to anyone buying throughout the entire State.

These programs often have very common traits that will be common across the board.  Some of the more common features of buyer assistance programs include:

  • May or may not require that you be a first time buyer
  • Minimum credit scores
  • Maximum loan, or purchase price limits
  • Maximum income limits

Down Payment Assistance Requirement:  First Time Homebuyer

The definition of a first time homebuyer for almost all programs is that you cannot have owned a home in the last 3 years.  First time homebuyer programs will typically require that you submit your last 3 years of tax returns.  This is to check to see if you are claiming mortgage interest on your tax return.

Down Payment Assistance Requirement:  Minimum Credit Scores

Buyer assistance programs are not typically used to help marginal buyers enter the housing market.  The exact opposite is actually true, because there is assistance, and the borrower has less “skin in the game”, requiring a minimum credit score is one way the program can reduce risk.  Minimum credit scores for most programs tend to be between 620 and 640, but will vary between all programs.

Down Payment Assistance Requirement:  Maximum Loan or Purchase Price Limits

Loan and purchase price limits go hand in hand with income limits in most cases.  The goal of homebuyer assistance programs is to help low to moderate income homebuyers afford the high cost of both downpayment and closing costs required to purchase a home. Income limits will most likely the limit the amount you can qualify for.

Down Payment Assistance Requirement:  Maximum Income Limits

Income limits can vary quite a bit based on the County you are buying in, and even how many people will be living in the home.  In some cases, this income is calculated in different ways, and can include income that you cannot use to qualify for the loan, but still receive.  An example of this would be income from a part time job, overtime, or bonuses that you do not receive consistently enough to use for qualifying for the purchase money loan.

Homebuyer Assistance is NOT Free Money

The single most important thing to remember is that downpayment, or closing cost assistance is never free money with no strings.  It is very common that downpayment and closing cost assistance programs come with higher interest rates, and higher fees.

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This comes down to weighing the risk against the reward.  In most cases, it’s a small investment to put you in a position to buy a home.  Most assistance programs will cover the higher closing costs of the program, in addition to paying part, or all of your downpayment.

Most homebuyer assistance programs have attractive benefits like zero interest rate, or forgiveness after so many years, or even an assistance grant that is neither a lien, or silent mortgage.  As long as you know that this assistance can, and in most cases will come at some cost, you can prepare yourself for what comes after the purchase of your new home happens.

City and County vs State Assistance Programs

The most dangerous features of some of these buyer assistance programs can be found in the details.  It’s not that any of these programs are actually bad, or dangerous for you as a homebuyer, but if a feature of the assistance sneaks up on you when you least expect it, it’s not a pretty sight.  Here are some examples:

City and County Down Payment Assitance Programs

It is not uncommon for City and County programs to have the most limited funds, and ironically, usually some of the most “unbelievable” assistance opportunities.  It is not uncommon to see a City or County program offer tens of thousands of dollars in downpayment assistance.  This money almost always has a catch.  Common features of “high payout’ City and County assistance programs include:

  • Waiting lists, or restrictions to only certain properties
  • You may not be able to apply for assistance until you have an offer accepted
  • You may be required to have a certain amount of your own funds in the transaction
  • There is often an equity share feature that entitles the City/County to a portion of your earned equity
  • They can run out of money at any time

Statewide Down Payment Assistance Programs

It is not uncommon for local, City and County programs, to be much more restrictive than Statewide assistance programs.  I recommend that you always compare local programs to Statewide programs.  While Statewide programs might not be as attractive in terms of the amount of assistance they offer, they are often much easier to qualify for, do not have limited funds, and can be used to buy any property as long as you meet the qualifying guidelines.

Frequently Asked Questions About Down Payment Assistance Programs

Are down payment assistance programs worth it?

They definitely can be, and in many cases, are the only way many first-time buyers are able to get into a home. You should definitely investigate the programs available in your city, county and state to see if you qualify, learn the details of those programs, talk with your potential lender, and consider both the pros and the cons of the programs you qualify to receive.

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Do you have to pay back down payment assistance?

Many programs do require repayment when you sell your home. Unlike a normal loan, that requires you to make payments each month, these “silent second mortgages” put a lien on your property that must be paid back when you sell or refinance your loan. Other programs have other ways of requiring repayment of the funds. You should be sure to ask questions until you understand the repayment requirements for the specific programs you are considering.

How long does it take to get down payment assistance?

How long it takes to get down payment assistance depends on the program and the demand for that program at the point when you apply. Every program has its own process, requirements, and processing speed. Plus, many programs have limited funding, so even if you qualify, you may need to wait until funds become available.

This is one reason we encourage you to investigate the down payment assistance programs available in your city, county, and state well before you make an offer on a home. Doing so helps you understand their requirements, whether you are likely to be approved or not, and how much you could receive before you are under the pressure of having to close on a loan within a certain number of days.

You should also recognize that down payment assistance usually increases the time required to close on your home, so ask questions about that in advance so you can build that into any offer you make on a home.

What is a silent second mortgage?

A silent second mortgage is a tool some down payment assistance programs use to have you repay the assistance they provide without requiring a monthly payment. Through this silent second mortgage, they place a lien on your account, which means that they will automatically be repaid when you sell your house or refinance your loan.

You need to understand exactly what the amount of the silent second mortgage will be so that when you sell your home the amount that must be repaid isn’t greater than your selling price (which would require you to have to come up with that extra cash at that time.)

Protecting Yourself Against Surprises

There are some very simple steps you can take to protect yourself against surprises after you’ve had an offer accepted on your dream home:

Work with an experienced assistance specialist. Make sure your loan officer has used the assistance program before, and if they have not, make sure they experience with similar assistance programs.  While many of these programs can be unique to the area where you are buying, most assistance programs have very similar traits and requirements.

Do your homework.  Get as much information about the assistance program as you can either online, from the assistance program website, and from your lender.  Ask lots of questions, and make sure that you compare all of the available programs that you might qualify for based on your debt to income ratios, credit score, purchase price, and income limits.

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Compare assistance programs.  If you qualify for one program, you may also qualify for other programs that use income, credit scores, and purchase price limits as the most common criteria for qualifying.  If you are looking at a local, City or County assistance program, also inquire about State assistance programs.

With a little bit of due diligence, some reading, and asking a lot of questions, you should be educated and empowered to make and informed decision about using down payment or closing cost assistance programs when you purchase home.

Have Questions About Down Payment Assistance Or Other Mortgage Issues?

We can help! You can Ask Your Question here and we will connect you with a Mortgage Expert in your area that can help, or you can find a Mortgage Expert Near You below this article.

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Teresa says:

    Thank you sooooooo much for this info. Knew there had to be a catch in there somewhere for assistance on down payment. I would rather save for the downpayment so I do not owe anyone else in the end. Was being strongly encouraged to the assistance so that I could purchase now. I politely told them no, till i did some research on “assistance.”

    • Scott Schang says:

      I’m glad we were able to tell the “other side” of the story. I do not want you to delay buying a home unless you think you can save the down payment in the next few months. The cost of waiting tends to far outweigh the cost of using assistance to get your foot in the door.

      Also, keep in mind that there are other ways to get assistance. Your lender, the Seller or your Realtor can both contribute toward your closing costs. There are some areas that are USDA eligible areas, which would allow you to use 100% financing to buy in these areas.

      Hope this helps?

  • Chebel Mina says:

    Very well written and informative