Down payment assistance (DPA) is intended to help home buyers afford the upfront cost of purchasing a home. Despite its name, down payment assistance can be used for both down payment funds as well as closing costs. Although every program is different, many of these options are intended to help low-income and first-time home buyers. These groups often need the most help because they’re not obtaining down payment funds based on the sale of a previous home. Down payment assistance comes in several forms:
- Grants: Grants are money that doesn’t need to be paid back. Because it’s free, this is the most sought after form of down payment assistance.
- Deferred loans: This is a down payment assistance loan that doesn’t need to be paid back right away. This might mean that payments don’t start for a certain number of years or that repayment isn’t owed until a specific event is triggered, like the sale of your home, a refinance or otherwise paying off your primary loan.
- Forgivable loans: These loans don’t need to be paid back if certain conditions are met. For example, many DPA loans come with the stipulation that you use the home as your primary residence for a number of years. An employer might require you to work with them for a given amount of time after receiving assistance.
- Individual Development Accounts (IDAs): IDAs are state-run programs that match the savings people put in their bank accounts toward specific goals that advance financial independence, including housing. There are typically matching limits, but the funds can be used toward your down payment.
- Matched savings accounts: These are the same as IDAs, but they’re not state-supported. Rather, banks and credit unions may offer them to attract depositors.
- Low-interest loans: These are like deferred or forgivable loans, but the repayment starts right away.
Finally, be sure to work with your mortgage lender because not every lender accepts all forms of down payment assistance. While we’ll go into greater detail in a bit, this usually has to do with the way liquidation works if your home falls into foreclosure.
How Much Money Is Needed For A Down Payment?
Not so long ago, the conventional wisdom was that you should have 20% of the purchase price to use as a down payment on a home. There are some good things about going this route because it means not paying for private mortgage insurance (PMI) on conventional loans. Plus, the higher your down payment, the lower your rate tends to be as well.
However, most first-time and low-income home buyers can qualify with a down payment as low as 3%. In fact, with ONE+ from Rocket Mortgage®, you can put as little as 1% down and we give you a 2% grant toward your down payment.1 This is available to both first-time and repeat home buyers and there are no restrictions on where you live. Here are the requirements:
- The income used to qualify for your mortgage can’t be higher than 80% of the median in the area you’re looking to qualify. Fannie Mae has an area median income lookup tool.
- Your qualifying FICO® Score must be 620 or better.
- This is only available for single-unit primary residences.
- Your down payment can be no higher than 5% after the 2% grant is included.
FHA loans offer the ability to qualify with a down payment of as low as 3.5% if you have a qualifying credit score of 580 or better.
VA loans are available for eligible veterans, active-duty service members, reservists, National Guard personnel, and qualified surviving spouses. These don’t require a down payment, although most require you pay a funding fee either at closing or built into the loan.
USDA loans are available for those who meet income limits that are looking to live in a designated rural area. The big benefit here is the ability to put nothing down as well. Rocket Mortgage doesn’t offer USDA loans at this time.
Beyond minimums to qualify for the loan, your personal finances will dictate how much you can put down. To secure the best interest rate and potentially avoid paying for mortgage insurance, you’ll want to put down as much as you can without putting other goals in peril. You’ll also have to pay certain closing costs, so don’t forget to plan for these.
Closing Costs
Closing costs are all the other fees besides down payment associated with setting up your loan. This can include everything from title work to the appraisal to the cost of filing paperwork with your county and setting up your escrow account.
Every loan is different, but generally, you can expect closing costs to be in the range of 3% – 6% of the purchase price of your home. You can cut costs by negotiating seller concessions to having them pick up part of the costs or taking a lender credit. That involves trading a slightly higher rate for lower upfront costs. However, down payment assistance can also be used to pay for closing costs.
