Understanding Down Payment Assistance
Don’t Be Discouraged by Down Payments
Buying a home can be a big deal, and many people are intimidated by the cost of purchasing a home, especially the down payment. A down payment is the upfront lump sum that a buyer pays toward the purchase price of a home. This is separate from the closing costs and is often understood to be an amount that is 20% of the purchase price.
However, there are opportunities to buy a home without a 20% down payment.
Using a Down Payment Assistance Program (DPA) can help people afford the upfront costs of buying a home. Down Payment Assistance (DPA) can be a grant or loan that offsets the amount a buyer must put down to purchase a home. These programs can help you buy a home sooner with less out of pocket cost, but it’s important to understand the DPA programs that are available to you as well as how they work.
Types of Down Payment Assistance
Grants: Cash gifts and don’t have to be repaid.
Forgivable Loans: Usually interest-free, these loans don't have to be repaid if you meet specific conditions.
Deferred Payment Loans: Another usually interest-free loan that works as a second mortgage loan without payments, but you do repay this loan if/when you sell the home, move out of the home, or refinance your mortgage.
Low-Interest Loans: These are simple loans that help cover down payment costs but with a subsidized interest rate.
Who Qualifies for DPA?
Every program is different but DPA programs are most often available to first-time home buyers and low-income home buyers. A first-time home buyer is sometimes defined as anyone who hasn’t owned a home in the past three years. When you are looking for DPA programs, be sure to read the qualifications thoroughly to see if the program is a good fit for you.
Benefits of DPA
The benefits of a Down Payment Assistance program are obvious. A strong DPA program makes homeownership more accessible and more affordable. Since most mortgages require a minimum down payment, a DPA can help you meet that minimum faster. You may also avoid PMI (private mortgage insurance when using a conventional loan and putting down less than 20%) when using a DPA.
You can also consider a DPA grant like “free money” to help you buy a house because you don’t have to pay it back. If you secure a DPA no or low interest loan, you can enjoy a substantially lower mortgage payment with less interest overall.
Drawbacks to DPA
With everything, there are potential downsides to using a Down Payment Assistance program. For example, not all lenders accept all types of DPA. A lender who isn’t sure about approving your loan, may see the DPA program as a red flag that you might not be able to handle the loan. Additionally, sometimes securing a DPA contributes to a home buyer overextending themselves. With DPA, you may be able to purchase a more expensive home than you would otherwise. A higher purchase price means you need a larger loan, and while the DPA may help you cover the down payment for a more expensive house, the greater loan amount means a more expensive monthly payment.
Finally, with some DPA programs closing may take longer as sometimes additional underwriting is required and other DPA programs sometimes have occupancy requirements that require the home buyer to live in the home for a specific number of years before you can move, sell, or refinance the home without having to pay back the borrowed DPA amount.
Navigating Your Home Buying Journey?
Whether or not you are seeking a Down Payment Assistance Program to buy your home, having a knowledgeable, experienced attorney can help you negotiate and secure the best outcome for your purchase. At Sable Law Group Wisconsin, we are ready to support you through the home buying journey.
A professional attorney provides the leadership and support you need during contract negotiations concerning this extremely important sale. We have extensive experience in negotiating real estate purchases and sales, and our expertise can help make the path to homeownership a smooth, well-executed journey to a house you want to call home.
Need help finding out if we’re the right fit for you? Check out our newsletter, Finding the Best Fit,” as a guide for choosing the right agent and/or attorney option for your needs!