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Down Payment Assistance for First-Time Buyers in 2023
When new buyers move into a neighborhood, the community benefits.
New homeowners make home improvements and raise local values, beautify lawns, increase curb appeal and, when homeowners spend money in local stores and businesses, they pay taxes that benefit the municipality.
Homeownership is the centerpiece of local U.S. economies, so area governments have incentives to make their streets attractive to incoming buyers.
That’s where down payment assistance comes in.
Down payment assistance programs make it possible for first-time home buyers to stop renting and start owning without saving for large, 20% down payments.
We cover everything you need to know about down payment assistance programs and how to find one today.
- → What is Down Payment Assistance?
- → How Does Down Payment Assistance Work?
- → Who Qualifies for Down Payment Assistance?
- → 5 Types of Down Payment Assistance
- → How to Find Down Payment Assistance to Buy Your Home
- → How Much Money Do You Need For a Down Payment?
- → Our Advice: Use Down Payment Assistance When It’s Available & Reasonable
What is Down Payment Assistance?
Down payment assistance (DPA) programs are locally-supported initiatives that give away cash grants, cheap loans, and tax breaks to buyers of U.S. homes.
The programs are funded and administered by government agencies, private foundations, and local charities; and, offer up to 100% financing on homes.
Many DPA programs behave like zero-interest-rate cash advances to be repaid when the home is refinanced or sold. Others grant money for specific purposes such as renovations to make homes more habitable, which raises local property values and property tax bases.
The amount of money you can receive from down payment assistance varies based on where you live, what you earn, and how early you apply for assistance.
Get pre-approved to see how much home you can afford.
How Does Down Payment Assistance Work?
Down payment assistance programs work by helping first-time home buyers purchase homes with little or none of their own money or down payment.
Down payment assistance programs are administered on the federal, state, and local levels. Federal DPA programs include first-time home buyer tax credits, cash grants to buy homes, and interest rate subsidies for higher home affordability.
Most DPA programs, though, are administered by state and local governments, and by private entities and charitable organizations. Non-federal programs may require buyers to use specific mortgage loan types such as FHA loans; and, may require additional paperwork not associated with the mortgage application.
Down payment assistance is sometimes paid as cash at closing or before. Other times, they’re awarded as forgivable loans and paid at the time of closing. Some DPA programs target professionals, such as teachers, nurses, and EMTs. Others are available to any person buying in a certain neighborhood or street.
Who Qualifies for Down Payment Assistance?
There are more than 3,000 down payment assistance programs available nationwide and the majority of DPA programs target first-time home buyers.
Federal DPA programs such as The $25,000 Downpayment Toward Equity Act target low- and middle-income first-time buyers and often add one or two additional eligibility criteria. For example, some programs are limited to teachers and nurses and EMTs. Other programs are for first-generation buyers only.
On the state and local levels, down payment assistance programs tend to be geography-based and available to home buyers only in specific cities, communities, or neighborhoods.
Down payment assistance programs don’t replace primary mortgages – they enhance them to make homeownership more affordable. Therefore, to qualify for down payment assistance, home buyers must also qualify for their mortgage.
Find out if you’re eligible by getting pre-approved.
5 Types of Down Payment Assistance
Home buyers can apply for 5 types of down payment assistance programs.
1. Cash Grants For Your Down Payment
Cash grants account for the majority of down payment assistance programs. The typical first-time home buyer cash grant award is around $10,000.
When down payment assistance is paid as a cash grant, there’s no requirement to pay it back. However, because grant programs are designed to build community and foster economic growth, it’s common for them to contain a 5-year clause that states that the buyer must live in the home for five years or the grant must be repaid in part or in full.
The Downpayment Toward Equity Act may offer first-time buyers up to $25,000 in cash that can be used for down payment, closing costs, and other home purchases.
Get pre-approved to see if you are eligible for cash grants.
2. Closing Costs Credits
Closing cost credits offer a one-time cash grant, paid at closing, to reduce the amount of cash required to buy a home. They offset the costs associated with buying your first home. Closing cost credits can be applied for mortgage closing costs, real estate taxes, title fees, and more.
Home buyers who receive closing cost grants aren’t required to repay them, although some programs may require buyers to maintain residence for 36 months, at least.
Seller Concessions — when the home seller contributes a portion of its proceeds to pay for the buyer’s closing costs — is the most common type or closing cost credit.
Note: this is different than a no closing cost mortgage where the lender pays your closing costs in exchange for a higher mortgage rate.
Get pre-approved as the first step towards closing cost credits.
3. Interest Rate Reductions
Some cities help to make homeownership more affordable by subsidizing low mortgage rates for their residents. Cash payments are delivered at closing which pay for mortgage discount points.
Mortgage discount points are a one-time, up-front fee paid to your lender at closing in exchange for a lower interest rate. One discount point costs one percent of your loan size and can lower your rate by 0.25 percentage points.
Get pre-approved to see what interest rate reductions are available to you.
4. Property Tax Bill Credits
Property tax bill credits and tax reductions are a variation on down payment assistance and are available to all home buyers – not just first-timers.
Tax bill programs award tax abatements and tax relief to home buyers in specially-designated zones of a city. Buyers receive favorable, long-term tax treatment which lowers their tax bill and saves money.
Some states and counties issue mortgage credit certificates for up to $2,000 which offset local property tax bills dollar-for-dollar.
Get pre-approved to see if you are eligible for property tax credits.
5. Down Payment Loans
The least common form of down payment assistance is interest-free down payment loans. Down payment loans affect a buyer’s loan-to-value, which can affect your mortgage pre-approved. Down payment loans come due when the buyer sells their home or refinances.
Get pre-approved to see if you qualify for down payment loans.
How to Find Down Payment Assistance to Buy Your Home
There is no comprehensive national database for down payment assistance programs. Some home buyer programs are applied automatically, including property tax abatement and federal tax credits to first-time buyers. Other down payment assistance programs can only be claimed with an application.
Local and state DPA programs aren’t advertised often, and they’re promoted poorly. The U.S. Department of Housing and Urban Development (HUD) maintains a semi-complete list of programs, listed by state, county, and city.
Prior to applying for down payment assistance, review the terms and conditions. Some DPA programs require buyers to finance with an FHA mortgage.
Get pre-approved for an FHA mortgage.
Others enforce a residency requirement of five years or more.
Down payment assistance applications can also add weeks to your expected closing window.
How Much Money Do You Need For a Down Payment?
Because of low-down payment loans and down payment assistance programs, buyers only need to put down as much money as they can afford.
This chart shows the median down payment made by first-time buyers since 1989. Down payment for first-time buyers averages near 7 percent and, in some years, it’s been as low as two.
81% of home buyers use mortgages backed by Fannie Mae and Freddie Mac, which require a minimum 3% down payment; and the majority of the rest use FHA loans which require just 3.5% down.
Other buyers use mortgage loans with no down payment requirement whatsoever.
Veterans and active military have access to 100% mortgages backed by the Department of Veterans Affairs, and eligible buyers in rural and suburban areas can use no-money-down loans via the USDA.
Get pre-approved for a low down payment mortgage today.
Our Advice: Use Down Payment Assistance When It’s Available & Reasonable
Down payment assistance programs are available in all 50 states and many U.S. neighborhoods. Federal programs that apply automatically, such as tax credits, should be accepted when they’re available.
By contrast, state and local programs should be scrutinized.
State and local DPAs often require formal mortgage applications and place constraints on home buyer financing. Sometimes, states require buyers to use specific higher-cost mortgages or mortgage lenders which offset or negate the down payment assistance program benefits.
Before using down payment assistance, perform a side-by-side comparison of buying a home with a DPA and buying a home without a DPA; then compare your options with a low-down payment loan.