The Home Buyer’s Quick And Easy Guide To Down Payment Assistance Programs
(NewsReady.com) – The old “rule” that homebuyers need to save 20% of the purchase price isn’t a rule at all. First time buyers only need between 3% and 5% to put down, and there are lots of down payment assistance (DPA) programs to help get that money together. There are also programs that offer assistance for closing costs, which are usually another few thousand dollars.
Mortgage lenders like for buyers to put down a lump sum of their own money for a couple of reasons. First, the smaller the mortgage loan, the more equity the buyer has in the property right from the beginning—their ownership stake is larger. Second, their monthly payments are lower, making the loan easier to afford.
Types of Down Payment Assistance
There are several types of DPA that support first time homebuyers.
- Federal Loans
- Conventional Loans
- Community Grants
- Chenoa funds
Federal Loans
The US government funds and backs mortgage loans through three programs.
FHA
FHA loans, offered through the US Department of Housing and Urban Development (HUD, is designed for first time buyers. Here’s why:
- Down payment as low as 3.5%
- Down payment and closing costs can be gifts (if certain requirements are met)
- Credit score minimum 500 (with 10% down, most FHA lenders require a 600 score)
- Flexible debt ratios
VA
The US Department of Veterans Affairs (VA) offers 100% financing to active and retired vets, and their surviving spouses. Buyers use traditional lenders for their mortgage, but the VA backs the loan. Some veterans are eligible for assistance with their closing costs, Go online to VA.gov to learn more about the VA loan programs and how to get the Certificate of Eligibility (COE) that confirms you are eligible for VA financing. Lenders require that COE.
USDA
The US Department of Agriculture runs a federal program is for homebuyers in rural areas. Buyers can go online to USDA.gov and plug in the zip code where they want to buy a home to find out if that area is part of the program. There are benefits to living in the country with USDA financing.
- 100% financing
- Credit score 640 minimum
- No loan limits
- Higher debt-to-income ratio
Conventional Loans
Private lenders offer conventional loans with as little as 3% down, and allow several options for buyers to obtain that 3% and the closing costs.
Conventional (Fannie Mae) 95 and 97 Loans
Fannie Mae 95% mortgages require 5% down, and 97% loans require 3% down. Buyers with high credit scores and lower debt ratios can qualify for these loans. Buyers must also complete an online HomeView education course to be eligible for a 95 or 97 loan.
- Credit score at least 620
- Debt-to-income ration under 45%
HomeReady
Buyers who qualify for a conventional HomeReady loan can finance 100% of the purchase price and closing costs. They can borrow up to 97% of the purchase price, and make up the balance with grants, gifts, and Community Seconds loans.
Community Seconds Loans and Grants
Local and state housing agencies and some nonprofits offer first time homebuyers second mortgages. These mortgages can cover all the remaining costs after the 97% primary mortgage. In some cases, that second lien is forgiven if the borrower meets certain conditions. Ask your lender about programs in your area, or search for “community seconds” online.
Some borrowers qualify for grants to make up the balance of the down payment and closing costs. Housing agencies, nonprofits, and religious organizations offer this kind of DPA, and so do some employers. Again, borrowers should research grants online or ask their lender. Unlike community seconds, grants are free money and don’t have to be repaid.
Chenoa Funds
These second mortgages range from 35 to 5% of the purchase price and can be used for any costs associated with the loan. Chenoa loans can be used for FHA or conventional financing, as long as the borrower meets those underwriting guidelines.
Before a potential homeowner decides there’s no way they will ever save enough money to buy a home, talk with lenders in your area about options for DPA.
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