5 Types of Down Payment Assistance: Are Grants Really the Best?
One of the most common questions first-time homebuyers have about down payment assistance is whether it’s a grant, loan, silent second, or something else.
The answer is yes.
Down payment assistance, or DPA, comes in many forms. Your eligibility determines the type you receive.
While a grant you don’t have to pay back sounds nice, it’s worth considering other types that may work even better. Either way, DPA can get you into a home years sooner than if you try to save up for a down payment.
Connect with a lender to check your down payment assistance eligibility.
1. Down Payment Grants
Most first-time homebuyers think of down payment assistance as a grant with no repayment required.
You simply buy a home and someone else pays your down payment, no strings attached.
While these programs exist, they are hard to find. In fact, the Urban Institute uncovered that just 9.4% of DPA programs were grants and 90% were loans. (About 1% were loan/grant combinations).
Grants come with prohibitively restrictive requirements like very low income thresholds or having to buy in certain neighborhoods. An example is Bank of America’s program.
Not very many people qualify.
Other more widely available grants are connected to a specific loan program with a higher interest rate and/or higher fees. Funds are then credited back to you at closing for the down payment.
An example of this DPA type is Texas’ TSAHC grant.
While these grants can help, they are no free lunch.
Always compare grant programs with other options to see if you’re getting the best deal.
Pros: Funds do not have to be repaid
Cons: Limited availability; can increase your interest rate and loan fees
2. “Silent” Second Lien with No Monthly Payment
You may find a better deal by choosing down payment assistance in the form of a second mortgage with no monthly payment.
These are often called "silent seconds." Though it's "silent," the first mortgage lender knows about it, assuming it's a legitimate DPA program.
For example, you are getting a FHA loan which requires 3.5% down. The DPA provider gives you a loan for 3.5% of the sales price, covering your entire down payment.
The second mortgage requires no monthly payment, so it does not increase your debt-to-income ratio or first mortgage eligibility.
It does not have to be repaid until you refinance, move, or sell the home.
Years later, when you have built equity in the home, you can wrap the DPA loan into your first mortgage with a refinance or pay it off when you sell the home.
Pros: No monthly payment; does not affect the primary mortgage approval
Cons: May limit the ability to refinance, move, or sell the home later
3. Forgivable Loan
Another fantastic option for DPA is a forgivable loan.
You can think of this option as a hybrid between a loan and a grant.
It starts as a loan, typically with no monthly payment and zero interest. If you remain in the home as your primary residence – typically between three and 10 years – the loan is forgiven.
This encourages homebuyers to become part of the community – one of the goals of many housing finance agencies. It keeps them from converting the home into a rental too soon. Don’t be surprised if the housing agency requires an annual check to make sure you’re still in the home.
Pros: Does not have to be repaid if you live in the home long enough and meet other program requirements.
Cons: You must repay the loan if you move or sell within the required timeframe.
4. DPA Loan With Payments
Another type of DPA is the kind most of us are used to: a loan with regular payments.
For example, you get a loan for $10,000 to cover your down payment and closing costs. You make payments on the loan each month to the same or separate lender.
DPA of this type will increase your debt-to-income ratio, so it’s not an option for those already near "DTI" limits. But it may work for some applicants with higher incomes.
You can’t get just any loan, though. You must seek a loan that qualifies as a “community second.” Agencies that issue these loans are typically:
Federal, state, and local agencies
States, counties, and local municipalities
Housing finance agencies
Nonprofit organizations
Employers
Federal Home Loan Banks, through their affordable housing programs
Recognized Native American tribes and their related agencies
Often, the primary mortgage lender offers both loans as a package deal. Other times, you can find your own eligible source.
Pros: Less stringent income limits and other restrictions.
Cons: Higher costs; the second mortgage payment can jeopardize your first mortgage approval.
5. Lender-Funded DPA
Lender-funded DPA can come in any form listed above: a grant, loan, or something in between. It’s worth calling out separately because many of these programs are available nearly nationwide without income limits.
Despite the name, the DPA funds come from you, not the lender. How so?
The lender raises your interest rate and loan fees. It then uses these funds to issue your down payment at closing through a third-party entity.
It’s a bit of a shell game.
Nonetheless, these programs are acceptable by the Department of Housing and Urban Development (HUD), which administers FHA loans. Even though you’re paying for it, lender-funded DPAs can help you break into the housing market with no down payment or a small one.
Sometimes these are non-repayable grants, sometimes they are loans. Loans will probably come with lower rates and fees.
Just read the fine print. Some programs do not allow you to refinance for years, making you ineligible to drop your rate and payment.
Pros: Widely available; often no geographic or income restrictions.
Cons: High rates and fees; may not be able to refinance out of the loan.
Which DPA Type Will You Choose?
While DPA isn’t as straightforward as some homebuyers would like, it’s still a viable solution for those willing to put in the effort.
Contact a lender to check your options. You might be surprised what DPA can do for you.
