Down payment assistance programs for all homebuyers

A lack of savings for a home down payment doesn't have to derail you from buying the house of your dreams.

All across America, there are thousands of down payment assistance programs designed to help renters successfully transition into their own homes.

Unfortunately, a recent survey from NeighborWorks America found that 70 percent of U.S. adults are unaware that down payment assistance - free housing grants, funds toward closing costs, and other aid - was available in their neighborhood.

"People don't know all the different options, mainly because the information isn't in one place," says Ronni Cohen, former executive director of the Delaware Financial Literacy Institute, also known as The Money School, in Claymont, Delaware. "But having help with a home down payment makes a big difference because buying a home is so complex and it costs so much money."

Individuals who are aware of down payment assistance often mistakenly assume that such aid is only for first-time homebuyers and low-income households. But many programs target move-up and repeat buyers too, as well as homebuyers from all income levels. In general, anyone who hasn't held an ownership interest in a home in the last three years is again considered a first-time homebuyer for the purposes of many DPA programs.

Here is an quick overview of what's available nationwide - as well as answers to some important questions about down payment assistance programs.

What type of down payment aid exists?

Home down payment assistance takes many forms, from free grants and cash gifts for down payments to money for closing costs, prepaid escrows, and other mortgage expenses.

Special programs with competitive mortgage rates also abound. There are 100 percent financing programs - a huge bonus for anyone who doesn't have a down payment - as well as home loans with no interest, low interest rates, or below-market interest rates.

Down payment assistance often comes in the form of second mortgage loans that are forgiven after a set period of time, usually anywhere from 5 to 15 years. Last, federal and state housing tax credits are offered as another way to increase homeownership and help overcome the down payment hurdle.

"The most prevalent down payment benefit is about $10,000," says Rob Chrane, president and CEO of Atlanta, Georgia-based DownPaymentResource.com, which has a database of more than 2,400 programs nationwide.

But Chrane emphasizes that in some high-cost places, like San Francisco, down payment assistance might even hit as much as $100,000 to $200,000.

What types of homes qualify?

Nearly every type of residence is eligible for some type of down payment assistance program, including single-family homes and multi-family properties, townhouses and condos, modular homes, and manufactured housing. Funding is also available for those buying fixer-uppers that are in need of repair or renovation.

In fact, 87 percent of properties in the U.S. qualify for down payment assistance, according to research from DownPaymentResource.com.

Federal and/or National Programs

Many people have heard of popular federal programs, such as FHA loans and VA loan programs. But one lesser-known option for down payment assistance is the Rural Development Housing & Community Facilities Program.

Administered by the U.S. Department of Agriculture, this program is designed specifically for low-income individuals who live in a rural community - or plan to move to one.

While a borrower's income cannot exceed 115% of the area's median household income, you might be surprised at how close "rural" areas are to major cities and suburbs, so don't simply assume since there aren't farms nearby that you're not eligible. You'll have to check, and the USDA has a map and lookup tool for eligible properties that makes it easy to find out.

The Rural Development programs help people ease into homeownership by providing borrowers with a cash subsidy or by guaranteeing a no-down payment loan, known as a Section 502 loan. To qualify for the latter, the home can't be more than 1,800 square feet, it must be the homeowner's principal residence, and borrowers must also meet income eligibility requirements.

In addition to Section 502 loans, the USDA operates several other home loan programs.

State, County and Local Programs

Other down payment assistance for a home can be obtained from states, counties, cities or local townships. The aid is most often either an outright grant or loans called "silent seconds." A "silent second" is a no-interest loan, that doesn't require a monthly payment and may not even charge any interest, either.

To locate programs in your area, turn to State Housing Financing Agencies. These are state-chartered entities established to help local residents secure affordable housing. However, don't forget to search for county- and even town-specific offerings, too, such as the examples below.

For example, through the State of New York Mortgage Association, eligible borrowers who are first-time homebuyers can secure a Down Payment Assistance Loan that carries a 0 percent interest rate, has no monthly payment and is forgiven after 10 years provided the homeowner continues to occupy the property. Assistance runs up to $15,000 and forgivable loan is attached to a SONYMA-offered first mortgage.

Meanwhile, under the Home in Five Advantage Program in Maricopa County, Arizona, both first-time and repeat homebuyers with incomes below $141,820 and a FICO score above 640 purchasing a house anywhere in the county can get up to 6% of the home's purchase price toward downpayment and closing costs. The maximum debt-to-income ratio allowed is 50%.

And the Savannah Dream Maker Program in Georgia also offers solid aid, with up to $30,000 in down payment and closing assistance in the form of a 30-year, deferred payment second mortgage at a 2% interest rate.

"My clients have used this program," says Grace Schiffman, an agent at Keller Williams Realty, in Savannah, Georgia, "and it really does help a lot of people become homeowners."

Start locating homebuyer programs in your state by reading our state-by-state review of programs -- but don't neglect doing your own local research in your town or county, too. Money for down payments and closing costs is out there, but it's up to you to find it!

This article was revised by Keith Gumbinger.