First-Time Homebuyer's Guide to Down Payments

First-time homebuyers often face a considerable financial obstacle when entering the housing market: the down payment. On average, first-time homebuyers’ down payments equal 7% of the purchase price. But for many first-time buyers, it's not feasible to accumulate this amount purely from their savings. 

According to the National Association of REALTORS® 2021 Profile of Home Buyers and Sellers, 61% of all buyers are able to draw from their savings for the down payment. However, this statistic skews heavily toward repeat buyers, who often rely on proceeds from the sale of a previous property.

For those purchasing their first home, coming up with the down payment can require creative solutions. Roughly 28% of first-time homebuyers turn to outside help, accepting gifts or loans from friends and family to gather the necessary funds. This reliance on external aid underscores the difficulty first-time buyers face in achieving homeownership.

This struggle is further evidenced by the fact that 29% of first-time buyers identify saving for a down payment as the most challenging step in the homebuying process. To reach their goal, many make financial sacrifices. These range from reducing spending on luxury items and entertainment to cutting their clothing budget.

Given these challenges, it's clear that many first-time homebuyers need assistance making their down payments. Down payment assistance programs offer valuable resources for these buyers, enabling them to surmount this initial financial barrier and take their first steps into homeownership.

What Are First-Time Homebuyers Down Payments?

In real estate, a down payment is the initial, upfront portion of the total cost of a home that you pay at the time of purchase. The rest of the home's price is usually covered by a mortgage loan. While it's commonly believed that you need to put down 20%, the reality is that first-time homebuyers down payments can be much less, thanks to various loan programs and options available today.

What Types of Down Payment Assistance Programs for First-Time Homebuyers Are Available?

There are many down payment assistance programs available to ease the financial burden for first-time homebuyers. 

Cash Grants

Cash grants are arguably the most straightforward form of down payment assistance. A specified amount is given to qualified first-time homebuyers to cover a portion or all of the down payment on their new home. For instance, the proposed Downpayment Toward Equity Act aims to provide up to $25,000 in cash to eligible buyers. Cash grants usually don't need to be paid back, as long as the recipient complies with the requirements, such as living in the home for a minimum period (often 5 years).

Closing Costs Credits

This form of assistance reduces the expenses associated with finalizing a home purchase, collectively known as closing costs. These costs include appraisal fees, title insurance, and loan origination fees. Programs offering closing cost credits provide funds that offset these expenses. Most often, these credits don't need to be repaid, but might require the homeowner to live in the home for a certain period.

Interest Rate Reductions

Some down payment assistance programs work by reducing the interest rate on the mortgage loan, thereby decreasing the monthly mortgage payments. This can be achieved through buying down the rate using mortgage points, a process where the buyer pays an upfront fee to lower the interest rate on their loan. Over time, the reduced monthly payments can lead to significant savings, making homeownership more affordable.

Property Tax Bill Credits

Property tax bill credits and tax reductions are another variant of down payment assistance. Programs that provide this aid offer favorable tax treatment, which could lower the homeowners' annual tax bill, thus saving them money over time. 

For example, some counties issue mortgage credit certificates, which can offset local property tax bills dollar-for-dollar up to a certain amount.

Down Payment Loans

Though less common, there are options for down payment loans. These loans are often interest-free and are secured as liens on the home. Unlike conventional loans, they usually don't require a monthly payment. Instead, the loan is repaid when the homeowner sells the house or refinances the mortgage.

What Are the Qualifications for Down Payment Assistance? 

While the specifics of qualifying for down payment assistance vary, most are based on factors such as income, the home's price, and your history as a homeowner. 

Many of these programs are geared towards first-time homebuyers, but don't count yourself out if you've owned a home before. If you haven't owned a home in the past three years, many programs will still consider you a first-time homebuyer.

Here are the other most common qualifications required to receive down payment assistance.

Income Limits

Down payment assistance programs are often designed to assist low-income homebuyers. You'll need to fall below the income thresholds to qualify, which vary by location and size of household.

Credit Score

While various programs don’t specify a minimum credit score, many do. It's important to remember that even if a specific down payment assistance program doesn’t require a certain credit score, the mortgage lender likely will.

Primary Residence

These programs are typically only available for homes you plan to use as your primary residence. Assistance is not available for vacation homes or investment properties.

Homebuyer Education

Various programs require you to attend homebuyer education courses. These courses help you understand the responsibilities and financial obligations that come with homeownership.

Location

Many down payment assistance programs are location-based. They're intended to assist buyers in specific cities, communities, or neighborhoods.

Profession

There are programs that target professionals such as teachers, nurses, EMTs, or law enforcement officers.

Mortgage Qualification

Down payment assistance programs don’t replace a buyer's primary mortgage. Rather, they enhance a mortgage to make homeownership more affordable. Therefore, to qualify for down payment assistance, a homebuyer must also qualify for a mortgage.

Residency Requirements

Some programs enforce a residency requirement, meaning the homeowner must stay in the home for a mandatory number of years to fully benefit from the assistance.

How Can You Find Down Payment Assistance?

Finding suitable assistance for first-time homebuyers down payments can take digging, as the programs are not always widely advertised. A good place to start is HUD, which maintains a list of programs by state, county, and city. When considering a program, make sure the terms and conditions align with your financial goals and situation.

Which Mortgage Types Accept Down Payment Assistance?

Down payment assistance programs are a valuable tool that can be paired with different types of mortgages, making homeownership more accessible for many people. 

Here are several mortgage types that often allow for down payment assistance:

Conventional Mortgages

Conventional mortgages are offered by private lenders, such as banks, credit unions, and mortgage companies. With some down payment assistance programs, homebuyers may be able to apply their assistance to conventional loans that require as little as 3% down.

FHA Mortgages

FHA home loans are insured by the Federal Housing Administration. They are popular among first-time homebuyers because they allow lower credit scores and smaller down payments than conventional loans. Many down payment assistance programs can be used in conjunction with an FHA mortgage.

VA Mortgages

VA loans are available to current members of the U.S. armed forces, veterans, and eligible surviving spouses. Guaranteed by the U.S. Department of Veterans Affairs, VA loans offer benefits such as no down payment or private mortgage insurance (PMI) requirement. Some down payment assistance programs can be applied to VA loans, but it's less common due to the zero down payment feature.

USDA Mortgages

These loans are for homes located in rural and specified suburban areas, backed by the U.S. Department of Agriculture. Like VA loans, USDA loans offer the benefit of no down payment requirement. Down payment assistance may be applicable, but it's not standard because of the no down payment component of the loan.

Remember, each down payment assistance program has its own rules and eligibility requirements, and not all of them can be paired with every type of mortgage. It's essential to do your research or consult a housing counselor or mortgage professional to understand which combination of mortgage type and down payment assistance program best fits your financial situation and homeownership goals.

You Can Benefit From First-Time Homebuyers Down Payments

Understanding and navigating first-time homebuyers down payments can feel challenging. But with the appropriate information and resources, the process can become manageable and even rewarding. By leveraging down payment assistance programs and exploring different mortgage options, you can find a down payment solution that fits your needs and brings you closer to owning your first home.