What Is Down Payment Assistance?

Down payment assistance is any program or funding option that provides money for a down payment. More broadly, you could consider low down payment programs a form of assistance, but typically when we talk about this, it’s in reference to options for funding a down payment. Also, the down payment assistance we’ll be discussing is specifically aimed at helping you afford a home rather than a car or other expensive item.

How Does Down Payment Assistance Work?

There are several different methods of getting funding for your down payment. Different lenders will accept different options for down payment assistance, so it’s one of the questions you should ask a lender as you shop. Let’s look at the different types of down payment assistance available.

Grants

Grants offer free money that doesn’t need to be paid back. Free money is the best kind and it can really help with your down payment. There are many grant programs out there tailored to specific groups and areas of need. You can get grants from nonprofits, local governments and even employers.

Forgivable Loans (At Zero Interest)

Another option for a down payment assistance is a forgivable loan. Many of these have no interest at all. The nice thing about forgivable loans is that as long as you meet the conditions of the loan – like living in a house or working for an employer for a certain amount of time – they don’t need to be paid back. The money can go directly toward your down payment.

Deferred-Payment Loans (At Zero Interest)

Deferred-payment loans have a payback period that may not start for several years. This means you could use the money for your down payment now and still have other money available for other costs associated with buying your home, and pay it back later on once you’re settled in. The key here is to make sure it’s a zero-interest loan or the interest could really build up, particularly if it accrues during the period of deferred payments. This is another type of assistance you might commonly see from employers.

Low-Interest Loans

If you can get a low-interest loan, this may be another option to secure a down payment. However, lenders likely won’t allow you to take out an unsecured loan like a personal loan and use it for your down payment, with the exception being if you get a loan from an employer through an employer assistance program. Most of the time, you’ll have to have some collateral, like a car or the house itself.

One other option is to take a loan from your 401(k). If you do this, you have to pay back the loan with interest within a specific time frame set in your employer-sponsored fund, but you can borrow up to 50% of the account balance or $50,000, whichever is lower. Not all 401(k)s have this option. You also have to be careful. If you can’t pay back the loan, it becomes taxable income. In addition, if you’re under 59 ½, there’s a 10% early withdrawal penalty.

Qualifying For Down Payment Assistance

When looking for down payment assistance, it’s important to understand some of the common qualification criteria so you can look for an option that fits your situation. Every program is a little bit different and tailored to serve specific areas of need. However, there are several different types of criteria that are often seen.

First-time home buyer:

For many grants and other forms of assistance, you have to be a first-time buyer to qualify. However, depending on how they define that term, there may be flexibility. For example, many programs consider you to be eligible if you haven’t had a property interest in a number of years.

Location:

Many cities may offer forms of assistance in order to attract residents to live and work in a certain area. Typical requirements for this type of assistance include living in the area for a given time period.

Income:

Many programs are intended to serve residents who have low-to-moderate incomes, so there may be a limit on how much money you can make in order to qualify for assistance.

Special interests:

Some down payment assistance is intended to help specific populations such as a given racial or ethnic group, members of the military or people with disabilities, among others. This type of down payment assistance is often available from charities and other nonprofits with a focus on serving a particular community.