Buying, Finance, First Time Home Buyer's Guide, Mortgage 101

Find the Low Down Payment That’s Best for You

Many years ago, the primary sources of a home down payment lower than 20% were government programs like FHA and VA. Today, there are more than 1700 low down payment options available to help expedite the time it takes to put down a payment on your home.

Saving for a down payment is the greatest barrier first-time homebuyers face. More than half—56%—of a recent survey of millennial-age renters, say they’ve been unable to buy a home because they haven’t saved enough.

Down Payment Myths

One reason for the confusion is the surprising number of renters who believe that they will need at least 20% of a home’s purchase for a down payment. A recent National Association of Realtors report found that more than a third—36%—of people who do not own their own homes believe they need 20% or more. One study found that it will take a renter 6.5 years to save for a 20% down payment to buy a medium-priced home today.

It’s true that you will need 20% or more to avoid paying for mortgage insurance, but most homebuyers today, especially first-time buyers, are using low down payments to shorten the time it takes to save for a down payment.

Another myth is that low-down payments are available only to first-time buyers. It’s true that many assistance programs are designed to help renters looking to buy their first homes, but only about 63% are limited to first-time buyers.

Today’s homebuyer can choose from a variety of assistance programs sponsored by the federal government, like FHA and VA, or from non-profit organizations like NeighborWorks America, commercial lenders like banks and credit unions, or local employers seeking to attract workers and provide a benefit to their employees. The largest number of programs are available from state and local housing agencies. Non-profit organizations and corporations also promote homeownership through programs like Wells Fargo’s Neighborhood LIFT.

About 6% of low down payment programs are designed to attract and reward community service workers. These include:

  • First responders: law enforcement personnel, firefighters and EMTs
  • Medical professionals, especially nurses

Some examples:

  • Mobile, Alabama has launched the Public Safety Down Payment Assistance Program to help police officers and firefighters become first-time homeowners. The program provides up to $20,000 for down payment and closing costs and up to $40,000 in certain target areas.
  • Since 1998, the Mississippi Home Corporation Housing Assistance for Teachers (HAT) Program is available in 40 of the 82 counties in the state. It provides a forgivable loan of up to $6,000 for teachers who agree to a 3-year teaching contract in an eligible county.
  • HUD’s Good Neighbor Next Door program helps law enforcement officers, firefighters, EMTs, and teachers get 50% off the list price of a HUD foreclosure home.

How Down Payment Assistance Works

Most programs consist of either a loan or a grant to cover down payment and closing costs. About 10% are first mortgages, and a small number are mortgage credit certificates—a tax credit given by the IRS to low- and moderate-income homebuyers.

Similar to the way that FHA and VA work, the majority of down payment assistance programs are administered by local commercial lenders and guaranteed by the sponsoring organization, local governments, non-profits, or employers. These lenders are approved by the sponsoring organization. Low down payment options from commercial lenders are originated and underwritten by banks, credit unions, and other lenders. These loans usually require better credit ratings and less debt than 20% down loans.

In addition to mortgage insurance, about 50% of down payment assistance programs require first-time borrowers to take a homeownership education course that prepares them for homeownership, budgeting and credit management, financing a home, the loan process and timing, selecting a home, maintaining a home and finances, and avoiding delinquency and foreclosure.

New Ideas

Homewise, based in Santa Fe, NM differs from other homeownership organizations in two aspects. First, Homewise requires clients to put down only 2%. Homewise then provides a second mortgage for 18% of the purchase price with conventional interest rates and terms. The combination of the Homewise second mortgage and the down payment enables clients to avoid paying for private mortgage insurance. Second, Homewise offers services supporting buyers, from initial lender contact to the final financing of the home.

HomePossible, Freddie Mac’s program for very low- to moderate-income borrowers, provides a low down payment of 3%. Down payments can come from several sources, including “sweat equity” from owners to help meeting down payment and closing costs. HomePossible serves borrowers from millennials purchasing their first home to seasoned homeowners and retirees considering downsizing.

Fannie Mae’s HomeReady program also offers loans for a down payment as small as 3% to credit-worthy low- to moderate-income buyers. Families and friends can contribute to a down payment and buyers who put down 4% to 10% qualify for reduced mortgage insurance.

Maryland’s Smartbuy program helps homebuyers with qualifying student debt purchase a home. The program works by paying off student debt during the purchase of the home through special Maryland Mortgage Program (MMP) financing. Maryland SmartBuy initially required borrowers to purchase move-in-ready homes owned by the state of Maryland.  Maryland SmartBuy 2.0 changed the rule and now allows homebuyers to purchase any home in Maryland that meets Maryland Mortgage Program guidelines.

My First Texas Home helps first-time buyers and veterans with assistance up to 5% of the home’s price to pay to close and down payment costs. First-time buyers can also qualify for a dollar-for-dollar reduction on federal tax liability through the Texas Mortgage Credit Certificate Program.

Great Choice Home Loan Plus allows Tennesseans to apply for down payment assistance in the form of a second loan worth a maximum of 5% of the home’s purchase price. There is no interest on this second loan, and you don’t have to make any monthly payments on it either. You only have to pay it back when you sell, move out of, or refinance your home.

Ohio Housing Finance Agency’s (OHFA) Grants for Grads keeps recent college graduates in the state with a discounted mortgage interest rate and down payment at 2.5% or 5% of the purchase price. Down payment assistance is forgiven after five years as long as the borrower remains in the state of Ohio. If they move out of Ohio within five years, they must repay some or all of the assistance provided.

Rising sales prices are increasing down payment prices across the nation. More buyers, especially first-time buyers, are turning to low down payment loans to buy their first home before prices rise even more.

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Steve Cook is the editor of the Down Payment Report. He is a member of the board of the National Association of Real Estate Editors and writes for several leading Web sites, including Inman News. From 1999 to 2007 he was vice president for public affairs at the National Association of Realtors.

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