What is down payment assistance and how does it work?

• Grants, forgivable loans, deferred payment loans and low-interest loans are available to help cover down payments and closing costs.
• Eligibility for these programs often depends on factors like credit score, debt-to-income ratio, income and the completion of a homebuyer education program.
• Alternatives to these programs include matched savings, lender assistance and family gifts.

If you dream of homeownership but can’t afford the down payment required to secure a mortgage, there are state and local assistance programs that could help make your dream a reality. A number of programs are available to help cover down payments and closing costs for both first-time homebuyers and previous homeowners in need of financial assistance.

This guide will walk you through the different types of down payment assistance options available, how to find and qualify for them and what alternatives exist if you don’t meet the criteria. We’ll also explore the potential impact to your mortgage loan options and long-term equity to help you make an informed decision before applying for down payment assistance.

What is down payment assistance?

Down payment assistance programs aim to make homeownership more accessible, especially for first-time homebuyers. Typically offered by state and local agencies, eligibility for these programs depends on factors like your credit score, debt-to-income ratio, income level and whether you've completed a homebuyer education course.

Down payment assistance programs can help to significantly reduce the upfront costs associated with purchasing a home.

Grants

As a qualified homebuyer, you can receive funds to cover the down payment on your new home. This is money you don’t need to repay. Homebuyer grants can also provide closing cost assistance if you already have the full down payment amount.

Forgivable loans

Also known as “second mortgage down payment assistance programs,” these are low-interest or no-interest down payment loans that may be forgivable if you meet specific criteria. In most cases, borrowers must continue to own and live in the home for a set time to avoid repaying the loan.

Deferred payment loans

These tend to be zero- or low-interest loans that offer a fixed rate to help cover down payment and closing costs. Typically, payments aren’t due unless you sell the home or refinance your mortgage. If you decide to sell and have a zero-interest deferred-payment loan, you only have to pay back the amount you borrowed, regardless of how much time has passed.

How to get down payment assistance

Many programs and options are available to help you afford the down payment on your new home. While most of these down payment assistance programs are meant to support first-time homebuyers, don’t let past homeownership deter you.

Finding homebuyer programs

If you haven’t owned a home in the past three years, you may still qualify for a location, income-based or First Time Homebuyer program. Non-first time homebuyers may still be eligible for other programs.

Eligibility for these programs typically depends on factors like:

• Credit score
• Debt-to-income ratio
• Income
• The number of people in your household
• The home purchase price (which can’t exceed the maximum limitations set by the agency offering assistance)
• Completion of a homebuyer education program

Meeting requirements

Each down payment assistance program will have its own application process and requirements, which can vary by state. Working with a local real estate professional can provide you with valuable insight and understanding on local programs offered by your city and county. You can also get pre-qualified with a lender who works with home down payment assistance programs. Once approved for assistance, the program will send the funds to the lender at closing.

Should you use down payment assistance?

Mortgage down payment assistance programs can be a great option to help you become a homeowner when you don’t have the funds readily available to cover a down payment. However, it’s essential to review the mortgage interest rates offered by these programs so you have a strong understanding of the total cost of homeownership.

At times, these rates can be higher and could result in a more expensive mortgage with a higher monthly payment. If that’s the case, you’ll have to evaluate your options and decide what’s best for you. Some buyers may choose to delay their home purchase, saving for the down payment on their own to secure a better mortgage interest rate. While the average down payment on a house will vary, this approach can result in long-term savings, depending on your financial situation.

On the other hand, there are buyers who qualify for down payment assistance programs and choose to accept higher mortgage interest rates. This allows them to purchase a home sooner while they benefit from lower out-of-pocket expenses in the short run.

Deciding whether you should leverage a down payment assistance program will depend on your long-term goals, your lender, and your immediate need for homeownership.

Alternatives to down payment assistance programs

If you don’t qualify for down payment assistance but still need help covering the initial costs of homeownership, consider these alternatives.

Matched savings programs

These programs partner with nonprofits or government agencies to help you with your down payment. They involve opening a dedicated down payment savings account, matching your contributions, and helping you save faster.

Lender assistance programs

Some lenders offer their own assistance programs. Typically, these options have fewer restrictions on ownership history. They’re often available to current homeowners, as well as first-time buyers. Usually, these assistance programs come in the form of loans that require you to use the funds to purchase your primary residence. They offer fixed interest rates set by the lending institution, based on their eligibility requirements.

Family gifts

Parents or other relatives can give you the funds needed to cover all or part of your down payment. If you choose to use family gifts to secure your home mortgage, you must document these funds. Keeping the gift amounts within your lender’s limits is also important. Lenders may have restrictions on what percentage of your down payment can be covered by gifts. If applicable, keeping the gift amounts within your lender’s limits is also important.

Government loans

Government-backed loans—such as FHA, VA and USDA loans—often require lower down payments, making them a viable option if you don’t qualify for down payment assistance programs. Chase does not offer USDA loans at this time.

In summary

Down payment assistance programs and their many alternatives provide valuable opportunities to make homeownership attainable. From grants and forgivable loans to family gifts and government-backed mortgages, there are resources available to help you cover down payments and closing costs, bringing you closer to owning your dream home.

Ready to explore your options? Use our homebuyer assistance finder to review available programs and see what you may qualify for.

Down payment assistance FAQs

What are the tax implications of down payment assistance?

The tax implications vary depending on the type of assistance. Grants usually aren’t considered taxable income, but forgivable loans might be, depending on your terms. Always consult a tax advisor to understand your specific situation.

Can down payment assistance be used with VA or USDA loans?

Yes, down payment assistance can often be used with VA or USDA loans, although the specific programs available may vary by lender and state. Chase does not offer USDA loans at this time.

How does down payment assistance affect closing costs?

Some down payment assistance programs also cover closing costs, reducing the amount of cash needed at closing. Additionally, some programs target closing costs specifically, allowing you to allocate other savings toward your down payment.

Can I modify my down payment if I don’t qualify for down payment assistance?

Yes. In certain cases, you may be able to modify your down payment. While down payment amounts are generally fixed, depending on your situation, it’s possible to negotiate with the seller or work with specific homebuyer programs that may offer more flexibility. Make sure to communicate clearly with your lender and real estate agent to explore your potential options.