• Down payment assistance (DPA) programs can help make homeownership more accessible to buyers.
  • Grants can help buyers cover some of the down payment, reducing the amount they need to pay out of pocket.
  • Certain loans and specialized programs may feature lower downpayment requirements.
  • Down payment assistance may be available through the government, local municipalities, mortgage lenders, or charitable organizations.

Do you dream of buying a home? But maybe you’re concerned about affording the down payment. Thanks to down payment assistance programs, the amount of money you need for a down payment might not be as much as expected. 

There are several DPA options to choose from.

In this article, you’ll learn:

  • How  DPA programs work,
  • The types of DPAs available, and    
  • How to qualify for a DPA.

What Is Down Payment Assistance (DPA)?

Down payment assistance is any financial program that reduces the down payment requirement for homebuyers. 

Traditionally, buyers were required to pay 20% of the purchase price upfront as a down payment.[1] However, as home prices have increased over the years, new options have been created to allow buyers to purchase a home with less than 20% down out-of-pocket. Down payment assistance programs are currently available through the U.S. government, local municipalities, mortgage lenders, and charitable organizations.[2]

Types of Down Payment Assistance Programs

There are different types of DPAs available depending on your financial goals.

Loans

Loans can be used as down payment assistance in multiple ways. 

First Mortgages

Choosing a mortgage loan type with a low down payment can be considered a DPA. This is because it reduces the amount of down payment you would need, allowing you to pay less than the traditional 20% (although private mortgage insurance may be required for loans with less than 20% down). Each of the following loan options may offer low down payments to well-qualified buyers:

  • Conventional loan. The most widely used mortgage type, conventional loans, can offer down payments as low as 3%. 
  • FHA loan. FHA loans are often used by first-time homebuyers to get a down payment as low as 3.5%. However, FHA loans are not exclusive to first-time buyers. Those who have owned a home before may still qualify. 
  • VA loan. Reserved for military service members, veterans, and their spouses, VA loans can offer a 0% down payment option. 
  • USDA loan. Specifically for properties located in eligible rural areas, USDA loans can offer down payments as low as 0%.

Forgivable Second Mortgages

Forgivable second mortgages are 0% interest loans that don't have to be repaid if the owner remains in the home for a set period of time, typically between five and 20 years. If the owner moves before the forgiveness period ends, some (or all) of the loan must be repaid.

Deferred-Payment Second Mortgages

Second mortgages with deferred payment are 0% interest loans that do not need to be repaid until the homeowner moves, sells, refinances their first mortgage, or pays off the first mortgage. In many cases, deferred-payment second mortgages are repaid from the proceeds when the owner eventually sells the property. 

Low-Interest Second Mortgages

Some lenders might offer a low-interest second mortgage in conjunction with a first mortgage as a means of covering some of the down payment. The borrower repays this loan in installments, starting immediately, which means making two mortgage payments each month, one for the first mortgage and one for the second.

Grants

Grants are gifted money. These funds do not need to be repaid. State and local governments may offer DPA grants to incentivize residents to purchase homes.[3]

Lenders may also offer grants to assist homebuyers with their down payments.  

Other Options

In addition to loans and grants, the following DPA programs can help buyers save on down payment expenses:

  • Mortgage credit certificates. Tax credits may not reduce the out-of-pocket down payment expense, but they can help you recover some of that expense when tax season arrives. Tax credits change with economic conditions, but there is a long-standing mortgage interest credit and multiple tax deductions for homeownership expenses. Information about current tax benefits for homeowners can be found on the IRS website.[4]
  • Matched savings programs. Matched savings programs, such as Individual Development Accounts (IDAs), allow homebuyers to save for their down payment while earning a matching contribution on each dollar saved. These programs may be sponsored by financial institutions or charitable organizations.  
  • Shared appreciation. With shared appreciation arrangements, organizations offer down payment assistance for homebuyers in exchange for a share in the appreciation, assuming that the property will grow in value over time.
  • Rent-to-own. If you’re looking to buy but need more time to save for a down payment and/or improve your credit to qualify for a home loan, renting-to-own may work for you. When you rent-to-own, you move into a home with the option to purchase the property at the end of the lease. You pay a rent premium through the lease term, which can be applied to the down payment if the purchase proceeds as planned.[5]

Who Qualifies for Down Payment Assistance?

Qualification requirements for down payment assistance vary widely by program and lender. However, as with other loan types, the following criteria are typically considered:

  • Credit score. To be approved for a home loan, you may need a credit score of at least 620. However, some lenders may offer FHA loans to buyers with lower scores.[6]
  • Debt-to-Income (DTI) ratio. Lenders want to confirm that you earn enough to comfortably cover the home loan payments, so they compare monthly debt payments to earned income. For mortgages, most lenders look for a 28% DTI ratio. 
  • Loan-to-Value (LTV) ratio. LTV measures the amount of a home that is financed compared to the home’s current value. For example, if you make a 3.5% down payment on a market-value purchase, the LTV would be 96.5% because 96.5% of the home is financed. 

Program-Specific Eligibility Criteria 

Down payment assistance programs may come with additional eligibility requirements as well. 

First-Time Home Buyer Status

Some DPAs are reserved for first-time homebuyers. However, the definition of a first-time buyer is generous. According to the U.S. Department of Housing and Urban Development (HUD), the following people qualify as first-time buyers:[7]

  • An individual who has had no ownership in a principal residence during the three-year period ending on the date of purchase of the property. This includes a spouse (if either meets the above test, they are considered first-time homebuyers).
  • A single parent who has only owned with a former spouse while married.
  • An individual who is a displaced homemaker and has only owned with a spouse (for example, a stay-at-home spouse who has been divorced and has never owned property alone).
  • An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations (such as a mobile home).
  • An individual who has only owned a property that was not in compliance with state, local, or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent structure.

Income Limits

Certain programs are designed to assist low-to-moderate-income homebuyers. These programs may have income limits to ensure financial assistance goes to those in need.  

Purchase Price Limits

Some programs are intended to help buyers purchase starter homes or modest family homes. In this case, there may be a purchase price limit to avoid having these funds applied to luxury properties.

Property Use Restrictions

As many DPAs are aimed at making homeownership more accessible, they may stipulate that the home be used as a primary residence, meaning you reside in the home. So, investment properties, such as rental homes, may not qualify. 

Home Buyer Education Requirements

Some down payment assistance programs may require buyers to complete an educational seminar or course. This is meant to confirm that the buyers understand the financial responsibilities of homeownership.

How To Find Down Payment Assistance Programs

To find a DPA, start by discussing your financial needs with a licensed mortgage lender.  

For government programs, the U.S. Department of Housing and Urban Development (HUD) posts information on federal down payment assistance programs and provides links to state government websites where you can search for state-sponsored programs.[8] You may also check with your county or city government to see if local DPA programs are offered.   

You can search online for DPA grants offered by non-profits.

The Process of Applying for Down Payment Assistance

While the specific process of applying for DPA will vary by program, here are the general steps to take:

  1. Review the available options with a licensed Mortgage Loan Officer and choose your DPA option.
  2. If your DPA comes in the form of a loan, make sure you understand any applicable repayment terms.
  3. Gather your financial documents. The DPA sponsor will likely need proof of identity and proof of income and may need information about the home you want to purchase, along with related loan details.  
  4. Review the eligibility requirements for your chosen program.
  5. Complete the application process. In many cases, DPA applications can be submitted conveniently online.