Down Payment Assistance for Homebuyers

Many potential homebuyers list a lack of savings to cover a down payment as their primary roadblock to homeownership.  Budgeting for a home purchase is instrumental to obtaining homeownership, but knowing how much of a down payment will be required and exploring your options for down payment assistance programs are also key.

According to a recent National Association of Realtors survey, "35% of consumers think they need 16% to 20% for a down payment, and 10% of consumers think they need more than 20% for a down payment."  While this is a misconception as there are many loan options that require far less of a down payment, there are ramifications for putting less than 20% down on a home purchase.  You will usually need to put at least 20% down to avoid Private Mortgage Insurance (PMI).  PMI is an extra cost added to your monthly mortgage payment, and it doesn’t go toward paying off your mortgage balance. PMI typically costs between 0.41% to 2.25% of the entire loan amount on an annual basis (depending on your credit score, loan-to-value (LTV) ratio, and debt-to-income (DTI) ratio).

Rather than surrendering to expensive PMI payments, it is best to explore down payment assistance programs first.  Real-ativity teamed up with David Rosa, Sales Manager for Renaissance Home Loans, to provide you with a comprehensive list of Federal, State, and County down payment assistance programs.  As a mortgage broker, Mr. Rosa strives to help homebuyers explore creative options for down payment assistance while shopping multiple lenders to find his clients the best rate and terms for their home loans.

CAN I USE GIFTS FROM FAMILY & FRIENDS FOR A DOWN PAYMENT ON A HOUSE?

Gift Funds for FHA Loans

The gift amount that you can use towards the down payment on an FHA loan depends on the guidelines of the specific FHA loan program you are using.

For most FHA loans, the entire down payment can be gifted from a family member or a close friend with a clearly defined and documented interest in the borrower. However, the gift must be considered a true gift, meaning that it is not a loan that must be repaid, and must be documented as such.

FHA requires that a “gift letter”, provided by the lender, should include the donor's name, relationship to the borrower, the amount of the gift, and the date the funds were (or will be) transferred. The donor will also be required to provide a bank statement showing that the funds came from their account.

There are no restrictions on the gift amount that can be used for the down payment and closing costs on an FHA loan.  It is recommended, though, that a gift donor consults with their tax expert regarding the tax implications of gift amounts above certain thresholds.

Consult with a lender to get more information on the specific requirements and restrictions for using gifts on an FHA loan.

Gift Funds for Conventional Loans

The amount of a gift that you can use towards the down payment on a conventional loan depends on the guidelines of the specific conventional loan program you are using and the lender's requirements.

For conventional loans on a primary residence or second home, the entire down payment can often be gifted as long as the borrower is making a minimum down payment of 20%.  When the total down payment is less than 20%, there are some cases in which the borrower is required to make a minimum 5% contribution from their own funds; i.e., when the property is a two- to four-unit primary residence or when it is a second home.  Gift funds are never permitted when financing an investment property.

If you plan on using a gift for a conventional loan, you will typically need to complete a gift letter (provided by the lender) stating that the gift is not a loan and that the funds are not expected to be repaid. The letter should also include the donor's name, contact information, and relationship to the borrower.

It is important to check with your lender for their specific guidelines and requirements for down payment gifts on a conventional loan. Some lenders may have their own restrictions on the gift amounts that can be used for the down payment and closing costs, so it is important to clarify these with your lender.

CAN I BORROW FUNDS FOR A DOWN PAYMENT?

Yes, it is possible to take a second mortgage to cover your down payment and closing costs on a home. A second mortgage is a loan taken out in addition to your primary mortgage and it is secured by your home as collateral.  Funds may also be borrowed from another secured asset, such as a retirement account.

Taking a second mortgage for a down payment and closing costs is a way to access funds for these expenses if you don't have enough savings or if you don't want to use your savings for these costs. However, it is important to consider the potential downside and risks of taking a second mortgage.

David Rosa, Sales Manager at Renaisanse Home Loans, elaborates, "One of the main drawbacks of taking a second mortgage is that it increases your overall debt and can result in higher monthly mortgage payments. Additionally, the interest rate on a second mortgage may be higher than the rate on your primary mortgage, resulting in higher interest costs over the life of the loan."

Before taking a second mortgage, it is important to carefully consider your financial situation and goals.  Be sure to consult with a financial professional to determine if this is the right option for you. You should also compare the costs and benefits of a second mortgage with other options, such as using savings or a personal loan, to determine the best option for your specific needs.

Borrowing funds for a down payment on a home is possible but is not always the best option. Depending on the type of loan you are applying for and the lender's guidelines, using borrowed funds for a down payment may not be allowed or could impact your ability to qualify for a loan.

If you do borrow funds for a down payment, it is important to consider the terms of the loan and the impact it may have on your monthly budget and long-term financial stability. Additionally, if you are unable to make the loan payments, it could harm your relationship with the lender.

CAN I USE MY RETIREMENT SAVINGS FOR A DOWN PAYMENT?

Yes, you can use retirement savings toward a down payment.  However, there may be ramifications.  Many retirement plans, including 401(k) plans and individual retirement accounts (IRAs), have penalties for early withdrawal, and you may be required to pay a 10% early withdrawal penalty in addition to taxes on the amount you withdraw. These taxes and penalties can make using your retirement savings for a down payment a very expensive option.  Additionally, using retirement savings for a down payment may leave you with a smaller nest egg for retirement and could impact your long-term financial stability. It is important to carefully weigh the risks and benefits of housing cost vs. retirement.

WHAT GOVERNMENT DOWN PAYMENT ASSISTANCE PROGRAMS ARE AVAILABLE?

There are both government LOAN assistance programs and GRANT programs to assist with the down payment on a home purchase.

Federal Down Payment Assistance Programs

Let's start with the Federal grant and assistance options available across the United States:

• Neighborhood Stabilization Program (NSP): The NSP provides grants to local governments to acquire, rehabilitate, and sell foreclosed properties to low- and moderate-income families.
• Community Development Block Grant (CDBG) Program: The CDBG program provides grants to eligible cities and counties to provide affordable housing and related services to low- and moderate-income residents. For a list of contacts in your area check this list on HUD's website.
• Federal Homeownership Set-Aside Program - FHLBanks make grants available to their financial institution members, who provide the funds for down payments and closing costs.

Florida Down Payment Assistance Programs

The state of Florida offers multiple programs to assist homebuyers with down payments, including:

• State Housing Initiatives Partnership (SHIP)  funds local governments to incentivize local governments to build and maintain affordable housing.
• The Florida Assist (FL Assist)
  • Up to $10,000 on FHA, VA, USDA and Conventional Loans.
  • 0%, non-amortizing, deferred second mortgage. The FL Assist is not forgivable. Repayment is deferred, except in the event of the sale, transfer, satisfaction of the first mortgage, refinancing of the property or until such a time the mortgagor ceases to occupy the property at which time, the Florida Assist will become due and payable, in full.
• The Florida Homeownership Loan Program (FL HLP) Second Mortgage
  • Offers $10,000.
  • 3% fully-amortizing, second mortgage.
  • 15-year term.  The FL HLP Second Mortgage carries a monthly payment. The remaining unpaid principal balance (UPB) is deferred, except in the event of the sale, transfer of the deed, satisfaction of the first mortgage
• HFA Preferred Grant which provides 3% or 4% of the purchase price of the house to use as a down payment and closing assistance. It doesn’t have to be paid back, but must be used with one of Florida Housing’s first-time homebuyer loan programs.
• HFA Advantage PLUS Second Mortgage.
  Qualified borrowers can use 3, 4, or 5% of the home’s purchase price toward a down payment and closing costs, forgiven after five years.
• Florida Bond Program: Available for buyers with a credit rating of at least 620 who have not owned a home in the last three years. Provides $15,000 for down payment assistance from the State of Florida.  Forgivable after 5 years of steady payments as long as you occupy the home and do not refinance the property.

Florida Hardest-Hit Fund (HHF) Program: Rather than assisting with the purchase of a home, this program helps Floridians maintain homeownership.  The HHF program provides mortgage assistance to eligible homeowners who have been impacted by unemployment or underemployment due to the COVID-19 pandemic.

Florida Down Payment Assistance Programs by County

1) Palm Beach County, Florida, has several grants available for homebuyers, including:

• Palm Beach County Homebuyer Purchase Assistance Program: This program provides down payment and closing cost assistance to low- and moderate-income homebuyers who meet income and credit requirements through "SHIP." Funds are awarded to assist with gap financing, lot acquisition; down payment; rehabilitation of property; and assistance with closing costs.
• Palm Beach County Neighborhood Stabilization Program (NSP): The Neighborhood Stabilization Program (NSP) was established through a grant to help communities that suffered from foreclosures or abandonment via the purchase and redevelopment of distressed properties.
• Community Development Block Grant (CDBG) Program: The CDBG program provides grants to eligible cities and counties to provide affordable housing and related services to low- and moderate-income residents.
• Palm Beach County Affordable Housing Trust Fund: The Affordable Housing Trust Fund provides grants and loans to non-profit organizations and government entities to develop and preserve affordable housing in Palm Beach County.

2) Broward County, Florida, has several grants available for homebuyers, including:

• Broward County Homebuyer Purchase Assistance Program: This program provides down payment and closing cost assistance to low- and moderate-income homebuyers who meet income and credit requirements. Program is available in:
  • Unincorporated Broward County
  • Coconut Creek
  • Cooper City
  • Coral Springs
  • Dania Beach
  • Davie ​
  • Hallandale Beach
  • Hillsboro Beach
  • Hollywood
  • Lauderdale Lakes
  • Lauderdale by the Sea
  • Lazy Lake Village
  • Lighthouse Point
  • Margate (limited funds) ​
  • Oakland Park
  • Parkland
  • Pembroke Park
  • Plantation ​
  • Sea Ranch Lakes
  • Southwest Ranches
  • Sunrise (No funds available)
  • Weston
  • West Park
  • Wilton Manors
• Neighborhood Stabilization Program (NSP): The NSP provides grants to local governments to acquire, rehabilitate, and sell foreclosed properties to low- and moderate-income families. It is here to "stabilize" communities with high rates of abandoned and foreclosed homes and to assist households whose annual incomes are up to 120 percent of the area median income (AMI).
• Broward County Affordable Housing Trust Fund: The Affordable Housing Trust Fund provides grants and loans to non-profit organizations and government entities to develop and preserve affordable housing in Broward County.
• Broward County Community Development Block Grant (CDBG) Program: The CDBG program provides grants to eligible cities and counties to provide affordable housing and related services to low- and moderate-income residents. These "Consortium Cities" have funds available:

Coconut Creek • Coral Springs • Davie • Deerfield Beach • Lauderhill • Margate • Miramar • Pembroke Pines • Plantation • Sunrise • Tamarac 

3) Miami-Dade County, Florida, has several grants available for homebuyers, including:

• Miami-Dade County Homeownership Assistance Program: This program provides down payment and closing cost assistance to low- and moderate-income homebuyers who meet income and credit requirements.
• Neighborhood Stabilization Program (NSP): The NSP provides grants to local governments to acquire, rehabilitate, and sell foreclosed properties to low- and moderate-income families.
• Community Development Block Grant (CDBG) Program: The CDBG program provides grants to eligible cities and counties to provide affordable housing and related services to low- and moderate-income residents.
• Miami/Dade The Affordable Housing Trust Fund provides grants and loans to non-profit organizations and government entities to develop and preserve affordable housing in Miami-Dade County.

GOVERNMENT-BACKED FINANCE PROGRAMS

There are also a number of government-backed finance programs that can help with down payments for a home purchase. These programs vary by state and may be designed for first-time homebuyers, low-income families, veterans, or other groups. Some of the most common programs include:

1. The Florida HFA Preferred Conventional Loan is a 30-year fixed-rate mortgage. It makes payments more affordable because the mortgage insurance is cheaper,  borrowers only need private mortgage insurance that covers 18% of the value, rather than the 35% that’s usually standard when borrowing 97%.
2. Florida HFA Preferred 3% Plus Conventional Loan has the same benefits as the Florida HFA Conventional loan, but also provides a grant for a 3% closing costs and down payment.
3. Federal Home Loan Bank's Down Payment Assistance Program: This program provides grants to low-income homebuyers to help with down payment and closing costs.
4. Federal Housing Administration (FHA) Loan: An FHA loan is a mortgage insured by the Federal Housing Administration that requires a lower down payment, typically 3.5%.
5. FHA also insures FHA 203(k) loans, which allow borrowers to buy and fix up a home with the same low credit and down payment flexibilities.
   - FHA's Limited 203(k) program permits homebuyers and homeowners to finance up to $35,000 into their mortgage to repair, improve, or upgrade their home. - FHA’s Full 203(k) program has no limit on the rehab budget, so long as the after-improved value of the home is supported by the total home cost (purchase price + rehab cost).
   FHA will lend up to 96.5% of the after-improved value on a single-family home and up to 75% on a 2-4 unit home.
6. Veterans Affairs (VA) Loan: A VA loan is a mortgage program for active-duty military members, veterans, and their surviving spouses that offers no-down payment options.
7. “Salute Our Soldiers” Military Loan Program (SOS) A variety of down payment grants and closing cost assistance products with little or no interest charged; it can be combined with the Homebuyer Loan Program (HLP) down payment assistance
8. United States Department of Agriculture (USDA) Loan: A USDA loan is a government-backed loan that helps low- and moderate-income families purchase homes in rural areas with no down payment.
9. Good Neighbor Next Door Program: This program provides an opportunity for law enforcement officers, pre-kindergarten through 12th-grade teachers, firefighters, and emergency medical technicians to purchase homes with a 50% discount.
10. Conventional 97 Mortgage – Fannie Mae and Freddie Mac both back the Conventional 97 program, which only requires 3 percent down, but a minimum credit score of 620. Like most conventional low-down payment mortgage programs, the borrower is also required to pay for private mortgage insurance (PMI), an additional cost with their monthly mortgage payment.
11. HomeReady Mortgage – Fannie Mae’s HomeReady mortgage program also requires just 3 percent down (with PMI, although it might be less expensive), and offers more flexible underwriting. There are income limits when the down payment is less than 5%.
12. Home Possible Mortgage – Freddie Mac’s Home Possible mortgage program is similar to the HomeReady mortgage, with a 3 percent minimum down payment. There are income limits when the down payment is less than 5%.
13. HomeOne Mortgage – This Freddie Mac mortgage also allows for just 3 percent down with PMI, but is available only to first-time homebuyers and comes with some special criteria.
14. Energy-Efficient Mortgage (EEM) (can be conventional, FHA, or VA) to finance energy upgrades and a home at the same time (new roof insulation, HVAC system, or hurricane impact windows), without requiring a larger down payment.

CONCLUSION

It is important to research the available down payment assistance programs and options. Consult with a mortgage broker, lender, or housing counselor to determine if you are eligible for any of these programs and learn about the specific requirements and restrictions. Additionally, you must compare the costs and benefits of these programs with other options, such as using savings, retirement funds, gifts, a second mortgage, or a personal loan, to determine the best option for your specific financial needs.

Contact a Mortgage Broker to Explore Your Options for Down Payment Assistance