Understanding Down Payments and Assistance Programs

The down payment is the part of the purchase price you pay upfront; the mortgage covers the rest. How much you put down shapes your loan options, your monthly payment and how much cash you need at closing. Week three of the plan is about understanding those tradeoffs and finding out whether help is available where you live.

How much do you really need?

You will often hear that buyers need 20 percent down. On a conventional loan, 20 percent is the point at which private mortgage insurance is not required, which is why the figure is so familiar. It is not a minimum for every buyer.

Common loan types at a glance

Requirements change, and lenders can set stricter rules of their own, so treat this as an orientation rather than a quote:

• Conventional loans are not backed by a government agency. Some conventional programs accept as little as 3 percent down from qualified buyers.
• FHA loans are insured by the Federal Housing Administration, part of HUD. The minimum down payment is 3.5 percent for borrowers with credit scores of 580 or higher.
• VA loans are backed by the Department of Veterans Affairs for eligible service members, veterans and some surviving spouses, and generally do not require a down payment.
• USDA loans serve eligible buyers in areas USDA designates as rural, with income limits, and generally do not require a down payment.

The tradeoffs of a smaller down payment

A smaller down payment can help you buy sooner, but it changes the math in a few ways:

• A larger loan. Borrowing more means a higher monthly payment and more interest over the life of the loan.
• Mortgage insurance. Conventional loans with less than 20 percent down usually carry private mortgage insurance. You can generally ask to cancel it once your balance reaches 80 percent of the home’s original value, and it generally ends automatically when your balance is scheduled to reach 78 percent, as long as your payments are current. FHA loans carry their own mortgage insurance premiums, and for many FHA borrowers those last for the life of the loan unless they refinance.
• A thinner cushion. With less equity, a dip in home values makes it harder to sell or refinance without bringing cash to the table.

Waiting to save more has costs too, including more months of rent. There is no single right answer. The goal this week is to see both sides clearly in your own numbers.

How down payment assistance works

Down payment assistance is help with the upfront cost of buying. It is most often offered by state housing finance agencies, cities and counties, and nonprofit organizations. Some employers offer it as a benefit.

Common forms of assistance

• Grants, which usually do not need to be repaid, though they can come with conditions
• Forgivable loans, which are forgiven over time if you live in the home for a set number of years
• Deferred-payment loans, which you repay when you sell, refinance or pay off the mortgage
• Low-interest second loans, which you repay alongside your main mortgage

Typical conditions

Each program sets its own eligibility rules. Common conditions include household income limits, a maximum purchase price, a requirement that the home be your primary residence, and completion of a homebuyer education course. Many programs are aimed at first-time buyers, a term that often includes anyone who has not owned a home in the past three years. Some require you to use a participating lender, and the assistance can affect the interest rate or fees on your main loan.

Before you commit to any program, read the repayment terms closely and ask what happens if you sell, refinance or move out early.

Gifts, savings and documenting your money

Lenders need to verify where your down payment and closing funds come from. Expect to provide recent statements for the accounts holding that money, usually covering the past two months. Large deposits that are not from your regular pay will usually need a written explanation and supporting paperwork, so avoid moving money between accounts more than necessary in the months before you apply.

Gift funds

Many loan programs allow gifts toward a down payment, typically from relatives, though the rules on who can give vary. Lenders commonly ask for a signed gift letter confirming the money does not need to be repaid, along with records showing the transfer. Ask your lender how they want a gift documented before the money moves.

Retirement savings

Withdrawing from or borrowing against a retirement account can carry taxes, penalties and a long-term cost to your savings. Some tax rules include exceptions for first-time homebuyers, but the details matter, so talk with a qualified tax professional before using these accounts.

Your week-three action list

1. Total the savings you could put toward a purchase, with your emergency fund set aside.
2. Compare how a smaller or larger down payment would change your monthly cost, including mortgage insurance.
3. Look up your state housing finance agency and contact a HUD-approved housing counselor.
4. If family will help, learn how your lender wants gifts documented.
5. File every statement in your homebuying folder.