Down payment assistance programs: how they work

What counts as down payment assistance?

There is no single federal DPA program. Assistance comes from many providers, mostly state and local housing agencies, and each sets its own income limits, price limits and repayment terms. The federal rules in this guide matter because they decide when a lender may accept that money alongside an FHA or Fannie Mae loan.

The assistance usually takes one of three forms:

• A grant or gift. Money with no repayment.
• A second loan. A lien behind your main mortgage. It may be repaid monthly, deferred until you sell or refinance, or forgiven over time.
• A subsidized price. Some programs lower the sale price and record a lien for the difference.

FHA rules (HUD Handbook 4000.1)

Handbook 4000.1 defines the Minimum Required Investment (MRI) as the borrower’s cash contribution, “at least 3.5 percent of the Adjusted Value of the Property.” The MRI may not come from the seller, from anyone who benefits financially from the sale, or from anyone they will reimburse. HUD’s interpretive rule makes one exception: a governmental entity acting in its governmental capacity may provide the MRI when it originates the insured mortgage through one of its homeownership programs.

Gifts. The Handbook lets these donors give gift funds: a family member, your employer or labor union, a close friend with a clearly defined interest in you, a charitable organization, and a governmental agency or public entity that runs a homeownership program for low- or moderate-income families or first-time buyers. The lender needs a signed gift letter stating the amount, the donor’s relationship and that no repayment is required. Cash on hand is not an acceptable source of donor funds. See gift funds for a down payment.

Second loans. The Handbook states that financing secured by a lien on the property “is not considered a Gift or a grant even if it does not require regular payments or has other features forgiving the debt.” FHA will insure a first mortgage on a property with a second lien made or held by a governmental entity if all of these hold:

• The second loan is disclosed at application.
• Its costs are not financed into the FHA loan.
• The FHA loan stays within the FHA nationwide mortgage limit for the area.
• The second loan’s payments count in the total mortgage payment.
• It produces no cash back to you, apart from an earnest money refund or costs paid outside closing.
• It has no balloon payment within 10 years, a rule that does not apply to the Federal Home Loan Bank Homeownership Set-Aside Program.

The Handbook sets no maximum combined loan-to-value for second loans from governmental entities. The Federal Home Loan Banks’ Affordable Housing Program Set-Aside is also an accepted source and may come as a grant or a second loan, with a recorded retention agreement. See FHA loans.

Fannie Mae Community Seconds

The Selling Guide defines a Community Seconds loan as “subordinate financing that is originated under an affordable housing program.” Fannie Mae does not buy the second loan; it buys the first mortgage that comes with it.

Repayment can be monthly, deferred, or forgiven over time. Its terms may not restrict a sale through foreclosure or a deed in lieu of foreclosure.

How to find a program

The CFPB says special programs exist for veterans and service members, rural residents and some first-time buyers, and that low-down-payment options “usually come at increased cost.” It suggests a HUD-certified housing counselor, who may know programs in your area. Ask each program for the repayment terms in writing, including what happens if you sell or refinance. Also check how a second lien affects your closing costs and your monthly payment.

Where states differ

State and local agencies run most DPA, and their rules change. Payotte compares them in first-time buyer programs by state. State pages include Texas and California.