How does first-time homebuyer down payment assistance work?

First-time homebuyer down payment assistance is money from a state, county, city or nonprofit housing program that covers part of your down payment or closing costs. It usually arrives as a grant, a low- or no-interest second loan, or a tax credit. If saving is your biggest hurdle, it is worth checking before you assume you have to wait years.

The catch is that every program has its own rules. Most limit your income and the home’s price, many require a homebuyer class, and some must be repaid when you sell or refinance. This guide explains the main types, who qualifies, and how to find programs where you plan to buy.

What is down payment assistance?

Down payment assistance (DPA) is help that lowers the cash you need to buy a home. It is mostly run by state and local governments and their housing finance agencies, often using federal grant money from HUD. Amounts range from a few thousand dollars to more, depending on the program and location.

According to Freddie Mac, state, county and city governments offer most of these programs. HUD gives grants to state and local organizations, and state and local housing finance agencies run many of the programs. Some programs focus on specific groups, such as veterans, Native Americans, and workers in education, health care, law enforcement and firefighting.

What types of down payment assistance are there?

There are three main types: grants you do not repay if you follow the rules, second mortgages with low or no interest that may be deferred or forgiven, and tax credits called mortgage credit certificates. Second mortgages are the most common. Each type affects your costs and future plans differently.

Grants

A grant is a gift of money for your purchase. Freddie Mac notes that grants generally do not have to be repaid as long as you own and live in the home for a set period. Grants are often smaller and in high demand, so funds can run out.

Second mortgages

Freddie Mac calls second mortgage loans the most common source of down payment help. They often have low or zero interest, payments are put off for a set period, and some are forgiven over time. Read the terms closely: “forgivable” and “deferred” sound alike but work very differently when you sell.

Mortgage credit certificates

Some state and local agencies issue a mortgage credit certificate (MCC). It lets you claim a federal tax credit for part of your mortgage interest each year, using IRS Form 8396. An MCC does not put cash in your hand at closing, but a lower tax bill can make the monthly payment easier to carry.

Who qualifies for down payment assistance?

Most programs look at four things: whether you are a first-time buyer, your household income, the home’s price and location, and whether you finished a homebuyer education class. You will also need to qualify for the first mortgage on your own credit and income. The exact limits vary by program.

Common requirements include:

• First-time buyer status. Many programs use the federal definition in 42 U.S.C. § 12704: someone who has not owned a home in the three years before the purchase. There are exceptions for some displaced homemakers and single parents. Some programs also help repeat buyers.
• Income limits. These are often tied to area median income (AMI), the middle income for your county or metro area. Limits change by household size and location.
• Price limits. Many programs cap the price of the home you can buy.
• Owner occupancy. You must live in the home as your main residence.
• Homebuyer education. Many programs require a class, often from a HUD-approved housing counseling agency.
• Your own money. Some programs ask you to put in a minimum amount of your own funds.
• Credit and debt. Your lender still checks your credit score and debt-to-income ratio. If your score is borderline, see whether you can buy a house with a 620 credit score.

Which loans work with down payment assistance?

Most assistance is designed to pair with common first mortgages: FHA, VA and conventional loans, including low-down-payment options for moderate incomes. The first mortgage and the assistance both have to follow their own rules, so your lender must approve the specific program you want to use.

Some loan options that often come up with assistance:

• FHA loans. HUD says an FHA down payment can be as low as 3.5% of the purchase price. Compare the options in our guide to FHA vs. conventional loans.
• Conventional loans with 3% down. Freddie Mac’s Home Possible loan allows 3% down for buyers with income up to 80% of AMI. With an eligible “Affordable Seconds” loan, total financing can reach 105% of the home’s value. Fannie Mae has a similar program called HomeReady.
• VA loans. The VA says eligible veterans and service members often need no down payment if the price is not above the appraised value. Assistance can still help with closing costs.

What are the downsides of down payment assistance?

The main costs are repayment rules, possible higher rates, slower closings and less flexibility. Some assistance must be repaid when you sell or refinance, and some first mortgages tied to assistance carry a higher rate. Funds can also run out, and paperwork can add time to your closing.

Things to check before you commit:

• Repayment triggers. Will you owe the money back if you sell, refinance or rent out the home?
• Rate trade-off. Ask for the rate on the first mortgage with and without the program.
• Time limits. Some agencies have limited yearly funding and long processing times.
• Smaller equity at first. Borrowing your down payment means you start with less equity, which can make it harder to sell soon or to remove PMI early.
• Combined payments. A repayable second loan adds a monthly bill on top of your mortgage.

How do you find down payment assistance near you?

Start with your state housing finance agency, then check your county and city housing departments. A HUD-approved housing counselor can tell you which programs fit your situation. Lenders that work with local programs can also search Freddie Mac’s DPA One database, which lists more than 1,000 programs.

Good places to look:

1. HUD’s state resources. HUD’s Buying a Home page links to homebuying programs and resources for each state.
2. Your state HFA website. Look for pages named “homebuyer,” “first-time buyer” or “down payment assistance.”
3. City and county housing offices. Many local programs are run separately from the state.
4. A housing counselor. Use the CFPB’s housing counselor search to find a HUD-approved agency near you. Many offer the homebuyer class that programs require.
5. Participating lenders. Freddie Mac’s free DPA One tool helps loan officers match buyers with programs.
6. Your employer. Some employers offer homebuyer help, and Freddie Mac’s Home Possible allows employer-assistance funds.

If you work as a teacher, police officer, firefighter or EMT, also look at HUD’s Good Neighbor Next Door program. It offers a 50% discount off the list price of certain HUD homes in revitalization areas, in return for living in the home for 36 months.

What to do next

The best next step is to learn your local options and line up the paperwork before you shop for homes. Assistance often adds steps, so starting early keeps your purchase on schedule. Use this short plan to move from “maybe” to a clear yes or no.

1. Figure out your target price and down payment with our guides on how much house you can afford and how much down payment you need.
2. Visit your state housing finance agency’s website and note the income limits, price limits and required class.
3. Book a homebuyer education class with a HUD-approved housing counselor.
4. Ask two or three lenders that work with your local program for a Loan Estimate with and without the assistance.
5. Get preapproved with the program included. Learn the difference in prequalification vs. preapproval.

Because assistance does not cover everything, also budget for fees using our guide to how much closing costs are.