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$25,000 Downpayment Toward Equity Act of 2021: Simplified

First-time home buyers may soon receive up to $25,000 in cash to purchase a new home.

On April 14, 2021, lawmakers introduced seventeen housing-related bills. One of the seventeen bills, the Downpayment Toward Equity Act of 2021, also known as the $25,000 First-Time Home Buyer Grant, addresses a related campaign promise from the Biden administration: To give Americans direct financial assistance to help them buy quality housing.

There are a few versions of a $25,000 grant now moving through Congress, so we’ll simplify the Downpayment Toward Equity Act and explain what you need to know. We’ll also show you who qualifies and when you can expect to see this $25,000 grant.

What is the Downpayment Toward Equity Act of 2021?

The Downpayment Toward Equity Act of 2021 and the $25,000 First-Time Home Buyer Grant both refer to the same thing. We’ll be referring to them in this post interchangeably.

 

The Downpayment Toward Equity Act of 2021 would provide eligible first-time home buyers up to $25,000 cash which they could use for down payment, closing costs, mortgage interest rate reductions, and other home purchase expenses.

Note that this is currently a bill and is subject to change by the time it becomes a law.

As of April 19, 2021, its eligibility standards are:

  • Must be a first-time home buyer
  • Must meet income limitations for your area
  • Must be purchasing a primary residence - no second homes or investments
  • Must use a government-backed mortgage
  • Must be a first-generation home buyer, or have parents or legal guardians who defaulted on a home loan, or lived in foster care during your lifetime

More on these requirements below.

Why Is This $25,000 Grant Important for First-Time Home Buyers?

The Downpayment Toward Equity Act of 2021 is designed to help renters purchase homes, grow roots, and build their household wealth; and, also reduce racial disparity.

The bill's opening paragraph states its goal:

To provide downpayment assistance to first-generation home buyers to address multi-generational inequities in access to homeownership, and narrow and ultimately close the racial homeownership gap in the United States, and for other purposes.

Homeownership matters because home equity is the largest wealth source in the United States - valued at more than $21 trillion - and homeowners are overwhelmingly white.

The homeownership gap between white and Hispanic households is currently 25 percentage points, and the difference between white and black households is currently 30 percentage points.

The Downpayment Toward Equity Act levels the playing field for disadvantaged groups. It's the most powerful piece of housing legislation since 1968's Fair Housing Act and Housing & Urban Development Act. The program makes homes more affordable to disadvantaged buyers, and incentivizes long-term homeownership.

Real estate wealth comes from compounding gains. Historically, the longer you own a home, the more wealth your household builds.

Who Is Eligible For The Downpayment Toward Equity Act of 2021?

The Downpayment Toward Equity Act is a bill in Congress. Bills aren't law, and bills change before they're passed into law. Therefore, when we discuss eligibility requirements, we have to remember that the rules as they're written today can be different from when the bill is passed into law.

Eligible home buyers must meet all of the following requirements:

Must be a first-time home buyer

Eligible home buyers are allowed to have owned a home in the past, but may not have owned a home or been co-signed on a mortgage loan within the last thirty-six months.

Must be a first-generation home buyer, or have lived in foster care

Eligible home buyers' parents or legal guardians may not have owned a home during the home buyer's lifetime unless a home was lost to foreclosure or short sale and the parents or legal guardians don't own a home currently. This requirement is waived for all home buyers who previously lived in foster care.

Must earn income that's above-average for an area, at most

Eligible home buyers must earn an income that's no more than 20 percent over the median income for a metropolitan area. For example, in Portland, Maine, where the median income is $60,000, home buyers must earn $72,000 per year or less to claim their cash down payment grant.

Note that income exceptions can be made in high-cost areas, such as New York, Los Angeles, and other cities where the cost of living is high. In high cost areas, eligible home buyers must earn an income that's no more than 80 percent over the local median income. In San Francisco, eligible home buyers must earn $189,000 per year or less.

Must use Fannie Mae, Freddie Mac, FHA, VA, or USDA

Eligible home buyers must use a mortgage that's backed by one of the five government mortgage agencies - Fannie Mae, Freddie Mac, FHA, VA, and USDA. These entities allow for no down payment (USDA and VA), 3 percent down payment (Fannie Mae and Freddie Mac), and 3.5 percent downpayment (FHA). Jumbo mortgages are ineligible for the program, along with other non-qualifying mortgage loans.

How Does the Downpayment Toward Equity Act Work?

The Downpayment Toward Equity Act of 2021 is a cash grant for first-time home buyers. It's not a loan, and it's not a tax credit. It's a cash payment made to eligible buyers at closing to be applied directly to the purchase transaction.

The standard cash award for first-time home buyers is twenty-thousand dollars.

An additional five thousand dollars is available, too, according to the bill's draft version. To get it, home buyers must qualify as a "socially disadvantaged individual," which includes all people who identify as Black, Hispanic, Asian American, Native American, or any combination thereof; or, who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.

Eligible home buyers can use the money as they please.

For example, if you purchase a home for $100,000, you could use the $25,000 credit to make a big down payment, cover all of your closing costs, then pay extra to get a lower mortgage rate.

  • $20,000 for a 20% downpayment on the home
  • $3,000 for real estate and title closing costs
  • $2,000 for access to a really low mortgage rate

How Can You Receive Your $25,000 Down Payment Grant?

As of April 19, 2021, this grant is still in progress as a bill and no one will receive any money until it becomes a law.

But, if it becomes a law, home buyers won't have to take action to collect their down payment grants. Mortgage lenders will do it for you, automatically. All you have to do is buy a home, show up at closing, and the money will be there waiting for you.

Home buyers using the program are required to participate in home purchase counseling from a government-approved counselor.

Most programs can be completed in 2 hours.

If you are wondering whether now is a good time to buy a house or if you should wait until this passes, it depends on your financial situation. 

If You Move Within 5 Years, You'll Have To Pay Some Money Back

For many homeowners, real estate wealth is transformative and generational which is why the Downpayment Toward Equity Act encourages a long-term view on homeownership. 

According to the bill's draft version, buyers who change their residence or sell within five years of purchase are required to forfeit back a portion of their initial grant.

  • Sell or move within Year 1: Repay 100% / $25,000
  • Sell or move within Year 2: Repay 80% / $20,000
  • Sell or move within Year 3: Repay 60% / $15,000
  • Sell or move within Year 4: Repay 40% / $10,000
  • Sell or move within Year 5: Repay 20% / $5,000

There are exceptions to the repayment rule, and no repayments are required for buyers who stay in their home for at least five years.

What Other Federal Down Payment Assistance Programs Exist For First-Time Home Buyers? 

There are currently two down payment bills moving through Congress, both offer up to $25,000 towards down payment assistance. 

The Downpayment Toward Equity Act (this one), and the First Generation Down Payment Assistance via the Housing is Infrastructure Act.

What is the First Generation Down Payment Assistance via the Housing is Infrastructure Act?

The First Generation Down Payment Assistance offers a $20,000 grant to use towards home buying expenses. Similar to the Downpayment Toward Equity Act, the bill offers a higher amount of $25,000 for those who are socially or economically disadvantaged.

The qualifying requirements for the Housing is Infrastructure Act are the same as the Downpayment Toward Equity Act in almost every way. The one difference is the definition of a first-generation home buyer.

The Downpayment Toward Equity Act says that buyers’ parents or legal guardians may not have owned a home during the home buyers’ lifetime unless they lost the home to short sale or foreclosure. The Housing is Infrastructure Act says that buyers’ parents or legal guardians may not currently own a home.

This small difference could help a lot more buyers qualify.

This program is still a bill and not yet a law, so it is currently unavailable until it passes. 

Questions Other Homebuyer Customers Are Asking About The $25,000 First-Time Home Buyer Grant

Here is a list of questions from other Homebuyer readers.

If you have a question and it doesn't appear here, use the chatbox and we'll answer you live. We'll then add your question to this FAQ because if you're asking a question, there's a great chance another person has the same question, too.

Is the $25,000 First-Time Home Buyer Grant the same thing as the $15,000 Biden First-Time Home Buyer Tax Credit?

No, they are two separate bills. The $15,000 Biden First-Time Home Buyer Tax Credit of 2021 was a campaign talking point and is proposed as the First-Time Homebuyer Act of 2021. If passed, this would provide a $15,000 tax credit, after closing, from the IRS.

Is the $25,000 Home Buyer Grant available yet?

No, the $25,000 first-time home buyer grant program is still unavailable. It's currently a congressional bill that could pass in a few weeks, a few months, or maybe never. We expect that the bill will pass in some form before the end of the year. To be informed of the latest program news, Homebuyer publishes a special newsletter for this topic only.

Register for our program emails here.

How do I apply for the $25,000 Home Buyer Grant?

Eligible first-time home buyers don't need to apply for the $25,000 Downpayment Towards Equity Act grant. Your loan application includes the necessary information to trigger your qualification. Your mortgage lender will arrange to have your grant money waiting at your closing.

How do I know if I earn too much for the Downpayment Toward Equity Act of 2021?

First, type an address into this government lookup. If the 1-unit dwelling value is $647,200, to find the median income for your area, use this chart from the Bureau of Economic Analysis. When you find your median income, multiply it by 1.2 to find the maximum income allowed under the program.

If the 1-unit dwelling value is above $647,200, multiply the median income by 1.8 to find the maximum allowed under the program.

If I have to move for work during the first five years, do I have to repay the $25,000 grant?

Yes, if you move or sell your home within five years using the program, you're required to pay back at least some of your grant.

If I'm a first-time home buyer but my fiancee is not a first-time home buyer, can we use the $25,000 First-Time Home Buyer Grant?

No, to use the $25,000 First-Time Home Buyer Grant, all home buyers must be first-time buyers who meet the program's eligibility standards.

Are there restrictions on how I use my first-time home buyer grant money?

Yes, you may use your grant funds to make a downpayment, pay for your closing costs, reduce your mortgage interest rate, and nothing else. In short, if the cost or fee is paid at closing, it's an eligible cost for the program.

 

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Dan Green

Dan Green

Dan Green is a former mortgage loan officer and an industry expert. He's appeared on NPR and CNBC, and in The Wall Street Journal, Bloomberg, and dozens of local newspapers. Dan has helped millions of first-time home buyers get educated on mortgages, real estate, and personal finance. Have mortgage questions? Ask Dan in the chat.

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