Written By: James Renshaw, AFC®
When working with clients interested in purchasing a home, one common question is, “What is a down payment assistance program?” Ultimately, a down payment assistance program helps qualified individuals and families pay for one of the burdensome upfront costs of homeownership. For clients who qualify, this could be an immense opportunity to make homeownership more of a reality and an easier one at that.
In the United States, purchasing a house has become part of the American Dream and a cornerstone of the economy. Homeownership has proven to promote positive multigenerational outcomes, including, but not limited to, stable home environments for children, more stable housing costs compared to renting, stronger community relationships, and specific tax incentives. But with this goal in mind, there come several barriers. One survey conducted by Bankrate, found here, named “can’t afford down payment” as the number three barrier in obstacles to homeownership, only following “not enough income” and “prices are too high.”
In addition to meeting specific credit and income standards, access to down payment funds is a significant barrier to homeownership. For many households, these costs can be prohibitively high, making it difficult or even impossible to achieve their goal of owning a home. The amount of financial resources required for homeownership can vary widely depending on several factors, such as location and property value. Still, the lack of these funds is a common obstacle that affects many aspiring homeowners.
There are options for clients who lack funds for a down payment but can afford the monthly mortgage payments and have a qualifying credit score. These options come from state governments, local governments, and nonprofits offering various down payment assistance products.
Down Payment Assistance Products
Typically, down payment assistance programs come from state, county and local offices, as well as non-profit agencies. These programs can payout in several ways, but there are four prevalent ones: grants, zero-interest forgivable loans, zero-interest deferred payment loans, and low-interest loans.
Grants are sums of money given for a specific purpose with no requirement to pay them back. For example, depending on the program, a grant could be used for a down payment or closing costs.
Zero-Interest Forgivable Loans
Zero-interest forgivable loans are loans to cover a down payment that collect zero interest. Then, after a specified amount of time or number of payments, the loan will be forgiven.
Zero-Interest Deferred Payment Loans
Zero-interest deferred-payment loans are loans for a down payment with zero interest and a specified future payment. The payment due date will depend on the conditions of the loan.
Low-interest loans cover the down payment over time with a lower interest rate than other products. This product takes the down payment and sometimes the closing costs, then spreads the amounts over several years.
While the four listed are the most common, other versions might be available. It is also important to know that the specifics might differ, and it is crucial to fully understand a program before recommending it to a client. These four specific programs and products can help a client achieve homeownership, but the counselor’s issue is finding these programs and making connections with the program’s staff.
Depending on the state the counselor is working in, the finance authority might facilitate a down payment assistance program. Depending on the distance between the counselor’s location and the state capital, meeting with the staff of these programs might be challenging. Plus, there will be more applications compared to county or local programs. To find out more about state programs in your state, check out these websites.
County & Local Programs
While almost all states have a down payment assistance program, counties, cities, and employers have far more. The search for these programs will fall on the counselors, but there are some places to start the search. First will be city hall; since homeownership directly ties to economic growth, many cities will have these programs within economic development or housing departments. Here you will typically also find housing counselors who specialize in housing issues. These housing counselors are perfect for connecting with clients and will be an excellent resource.
If city hall does not have a program, check out the county level. For example, several counties have an economic development initiative or an economic development council. In addition, the county offices might have a program designed to promote homeownership.
Also, many employers have a down payment or closing cost assistance program or a referral to one in the area. Employers see the benefits of homeownership on their employees, so it is worth the time for clients to call their Human Resources Office.
This search might take more phone calls, emails, and office visits than websites, but it is worth it. Making connections and learning about the programs in your immediate area can bring tremendous resources to your clients.
Certain non-profit entities host down payment assistance programs. For example, Habitat for Humanity, United Way, and even universities often have these programs. While several of these non-profits have programs similar to the four previously mentioned (grants, zero-interest forgivable loans, zero-interest deferred payment loans, and low-interest loans), there are also different ways they help.
A common way is through matched-savings programs. Matched-savings and Individual Development Account (IDA) programs are options for down payment assistance. Matched-savings programs also include developing personal finance skills, encouraging asset building, and helping with money management habits.
This search will take work, like county and local programs, but making these connections can help your clients.
Suppose your client is keen on becoming a homeowner, possesses a qualifying credit history, and has adequate income to support the expenses related to homeownership but needs more funds to cover the down payment and closing costs. In that case, they might consider these assistance programs. While searching for down payment assistance programs may require some effort in research and networking, the outcome could offer significant assistance to your clients.