6 Pitfalls of Down Payment Assistance Programs


What's the most difficult part of buying a home? For most, it's coming up with enough money for the down payment. The good news is that there are plenty of down payment assistance programs available to help buyers overcome this financial hurdle. Most of these programs are run by state or local governments, and they usually provide grants or forgivable loans for buyers who need help scraping together the thousands of dollars for a down payment.

There is a catch, though. These programs often come with strict requirements. Some, for instance, are only available to first-time homebuyers. Some aren't available to buyers who make too much money each year, and others require that buyers live in a home for up to five years after buying it. (See also: 6 Ways to Get Financially Fit for Homebuying Season)

Down payments are expensive

It's no secret why down payments are such a burden for so many homebuyers — they're costly. Consider that a 5 percent down payment on a home costing $200,000 comes out to $10,000. That's a lot of money for buyers to scrape together, especially first-time buyers who don't already have a home to sell.

If your FICO credit score is 580 or better, you can qualify for a loan insured by the Federal Housing Administration, better known as an FHA loan, for a down payment of just 3.5 percent of your home's final purchase price. The Fannie Mae-guaranteed HomeReady program allows you to qualify for a mortgage with a down payment of just 3 percent. And if even that 3 percent down is too much of a financial struggle? That's where down payment assistance programs can come in.

How down payment assistance programs work

Down payment assistance programs can work in several ways. Some will provide you with funds at closing that you can use to pay for your down payment or closing costs. Others will provide you with an interest-free forgivable loan that you can use to cover the same costs.

The Homebuyer Assistance Program run by the city of Chicago, for instance, provides buyers with a grant for up to 7 percent of buyers' total loan amount, based on income. Buyers can use this grant to cover the down payment or closing costs.

The Low Income Purchase Assistance Program from the city of Los Angeles is a bit more complicated. It provides a loan of up to $90,000 for down payment, closing, and acquisition costs. The loan is deferred, meaning that homeowners don't have to make any monthly payments on it. They only have to pay it back when they sell their home, pay off their mortgage loan, or transfer the title of their home. If none of this happens, they will have to pay back their loan in 30 years.

The city of San Antonio's Homeownership Incentive Program loans $1,000 to $12,000 at 0 percent interest in the form of a no-payment second loan. Buyers can use this loan to cover down payments or closing costs. The city says that 75 percent of this loan will be forgiven over a 10-year period.

So, yes, down payment assistance programs can help you get into a home. But remember, there are potential drawbacks that come with them. (See also: 4 Easy Ways to Start Saving for a Down Payment on a Home)

1. Some have income requirements

Most down payment assistance programs are only available to residents whose incomes fall under certain levels. In Chicago, for instance, buyers can have an annual income that is no higher than $131,775.

2. Most have residence restrictions

Other programs will only allow buyers to purchase homes in certain areas. The city of San Antonio's program, for instance, only allows buyers to purchase homes within city limits. The same is true in most other cities across the country.

3. You may need to take classes

Programs usually require that participants complete homebuyer education programs. In Los Angeles, for example, applicants must complete an eight-hour, in-person homebuyer education class given by an approved provider.

4. Be prepared to stay put

Many programs require that buyers live in the homes they purchase for a set number of years. In Houston, the city's Homebuyer Assistance Program requires that buyers live in their new homes for at least five years. If you sell your home before the set number of years, you'll have to pay back the assistance you received on a prorated basis.

5. You might have to be a first-time homebuyer

Many programs are only available to participants who meet the criteria of "first-time" buyer. There is some leeway here, though. You might be considered a first-time buyer even if you've owned a home before. Some programs define a first-time buyer as someone who has not owned a home in the last three to five years.

6. There might be home price limits

Many programs also limit the price of the new home you can buy. In San Antonio, for instance, you can only purchase an existing home costing up to $170,000. New-construction homes can only cost $228,000.

If you're struggling with down payment funds, consider assistance programs. Just remember that these programs do come with requirements that could limit the home you buy, where you buy, and how long you must live in that residence.

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