Last Updated on June 20, 2023 by Bob Filipczak
The pros and cons of down payment assistance fall into two categories: people love them or people like them. As with most financial assistance, there are usually hoops to jump through and requirements you must meet. When you weigh that against the benefits of getting free, or almost free, money for your down payment, you see what we mean.
Looking at the Pros and Cons of Down Payment Assistance
For many first-time home buyers, gathering enough money for a down payment is an ongoing struggle. Sometimes it seems like an insurmountable hurdle. The good news is there are programs available to assist with this: Down Payment Assistance (DPA) programs. Many of these can give you the bump you need to fund that down payment and achieve home ownership.
Who gets DPA: First-Time Homebuyers
When looking at the pros and cons of down payment assistance it is good to understand who qualifies. DPA programs are designed to aid potential homeowners, especially a first-time home buyer who might struggle to save the necessary funds for a down payment. These programs can reduce the upfront financial burden and make homeownership more accessible. For those who owned a home before but have not owned one in the last three years, many programs see these individuals as first-time buyers too.
If you are in this group and just beginning to think about a home, a mortgage and your down payment, we have a blog article dedicated specifically to you.
Pros: Types of DPA Programs
As we break down the pros and cons of down payment assistance, the following will be many of the pros of down payment assistance.
Grants are funds that do not need to be repaid, making them an incredibly appealing option. They’re usually offered by state or local governments, and nonprofit organizations. These grants may come with certain conditions, such as living in the home for a specific period or attending homeowner’s education classes.
An example of one grant program is the National Homebuyers Fund. There are many grants out there for qualifying home buyers so be sure to evaluate the pros and cons of down payment assistance grants you may qualify to receive.
These are loans that don’t need to be repaid if you fulfill certain requirements, such as living in the house for a specified period of time. However, if you sell the home before the end of the life of the loan, you may have to repay part or all of the loan.
The Maryland Mortgage Program is a good example of a forgivable loan.
Deferred Payment Loans
These loans require no payments until the homeowner sells, refinances, or pays off the house. While attractive, these loans often have a cumulative interest, which could lead to a significant payment down the road. The idea here is that once you build up some home equity, you will be able to easily pay off the loan and its accumulated interest. This is a get-your-foot-in-the-door strategy for funding your down payment.
An example of deferred payment loans for down payments is the Minnesota Start Up program.
Low-interest loans provide funds at a reduced interest rate, making repayments more manageable. However, keep in mind that even a low-interest loan is still a conventional loan, and it adds to your overall debt and monthly payments. These low-interest loans typically come from private mortgage lenders or banks.
Remember to check with your mortgage lender before you decide to pursue this path. How much debt you take on in order to get the down payment, and eventually, the mortgage loan will be one of their concerns.
Matching Savings Plans
These are programs where the agency matches the amount of money you save towards your down payment. While encouraging savings, these programs often have strict criteria for qualification and limits on the match amount.
The FDIC, for example, offers Individual Development Accounts that are matched savings accounts. In this case, the one drawback is the matching plan can take between 12 and 36 months to complete, so if you are in a hurry, this might not work.
Cons: How Long Does It Take to Get Down Payment Assistance?
Obtaining DPA can take anywhere from a few weeks to a few months, depending on the program and your eligibility. As we have seen in recent years, anything that slows down a first-time homebuyer in a competitive housing market is a problem. We are still in a sellers market, so bidding wars are still happening. When offers and counteroffers are flying back and forth, you don’t want to be waiting for approval on a grant or loan. This can be a disadvantage of down payment assistance programs.
In some cases you can get pre-approved for DPA, which would help you in a competitive housing market. One such program is called Homeownership Opportunity Minneapolis, which is a deferred payment loan.
Pros: Government Agency Programs for Down Payment Help
There are government-back mortgage loan programs that are often listed alongside DPAs but don’t exactly fit the definition. These are loan guarantee initiatives that can eliminate or greatly reduce down payments, but are not grants, or forgivable loans or deferred loan situations. They certainly help with down payments, but in a different way.
If you are a military service member or a veteran, you may be eligible for the most comprehensive down payment program: The VA Loan. With VA Loans, you get three substantial benefits
- No down payment
- A lower interest rate
- No private mortgage insurance (PMI)
There is a longer list, but those three advantages will save you thousands of dollars.
Like the VA Loan, the USDA loans are also zero down-payment loan guarantees. It’s designed to help folks who are interested in homes in rural areas. Technically, about 97% of the United State is considered rural, so this program is worth a second look.
The loan guarantee from the Federal Housing Administration, or FHA loan, offers very low down payments (3.5%) for qualified homebuyers of every stripe. FHA loans are for low to moderate-income earners who also have low credit scores.
Cons: Higher Rates and Additional Fees
DPAs often come with a higher interest rate and additional fees, such as origination and application fees, which can add to your total loan cost. It will depend on the mortgage lender what you will pay for. Some DPA programs, however, also help you with closing costs.
How to Qualify for DPA
Each down payment assistance program has its own qualification criteria. Generally, you must be a first-time homebuyer, have a low-to-moderate income, and be purchasing a primary residence. You may also need to complete a homebuyer education course.
Save an Average of $3,000 with Homes for Heroes
As you review the pros and cons of down payment assistance, you will find some programs have special assistance for community heroes, and we do too. Homes for Heroes assists community heroes across the nation to find and finance a home. We can also help you sell a home or refinance your mortgage.
The community heroes we serve include:
- Military (Active-Duty, Reserves and Veterans)
- Firefighters and EMS
- Teachers and Educators
- Healthcare Professionals
- Law Enforcement
After working with our specialists to close on your new home, we send you a Hero Rewards® savings check, averaging $3,000 if you buy or sell a home (or $6,000 if you do both). That money can be used on your new home or anything else as needed. It’s our way to say thank you for your service. Sign up today to speak with a member of our team, and they will get you started down the best path for your needs.