10 Pros and Cons of Down Payment Assistance Programs

For many future homebuyers, the hardest part of purchasing a home isn’t finding the right place, it’s saving up for a down payment and closing costs. Down payment assistance programs can help renters become homeowners sooner by covering part or all of these upfront costs.

In this Redfin article, we’ll cover 10 pros and cons of down payment assistance. Whether you’re looking to buy a home in Anaheim, CA, or a townhouse in Atlanta, GA, you’ll have the answers about whether down payment assistance is right for you. 

Key takeaways

• Down payment assistance can help make buying a home more affordable.
• Loans, grants, and credits are the three main types of assistance programs.
• Pros: Buying a home sooner, deferred repayment, less financial strain.
• Cons: Qualification and occupancy requirements, longer closing, paying more over time.

What is down payment assistance?

Down payment assistance helps lower the cost of buying a home by reducing the down payment or closing costs. These programs are offered at the federal, state, and local levels, and are often aimed at first-time buyers or those with low-to-moderate incomes. 

Types of down payment assistance programs

There are three main types of down payment assistance programs:

• Loans: These are often second mortgages that help you cover your down payment or closing costs. They’re typically deferred-payment loans, meaning you don’t have to repay them until you sell, refinance, or pay off your first mortgage. Some loans can be partially forgiven after living in the home for a certain amount of time. 
• Grants: Typically, you don’t have to pay back grants. However, you may need to meet specific eligibility rules, such as income caps or staying in the home for a certain period, for the grant to be fully forgiven.
• Credits: Also called “mortgage credit certificates,” credits help reduce the amount you pay in federal taxes on your mortgage interest. State or local housing agencies usually issue these credits, which can help you save money each year you own the home.

10 pros and cons of down payment assistance programs

There are pros and cons to down payment assistance programs to consider before applying for one.

5 pros of down payment assistance

1. You can buy a home sooner: The biggest advantage of a down payment assistance program is that homeownership becomes easier to achieve. If the biggest hurdle in your way is saving for a house, then assistance programs can help open the door.
2. Grants don’t require repayment: Most grants are essentially free money, as long as you meet the program’s conditions.
3. Some loans may be forgiven: Depending on the program, some loans may be partially or fully forgiven. There are usually requirements, such as living in your home for a certain number of years. 
4. Less financial strain: Assistance programs can reduce down payment and closing costs, which can make it easier to afford a home, and put less stress on your finances. 
5. Room to invest: If you have some funds leftover after purchasing, you may be able to use leftover funds for renovations, emergency reserves, or other investments.

5 cons of down payment assistance

1. Qualifying may be difficult: Every program has unique requirements, which may be difficult to meet based on your financial situation, location, and long-term goals. Many programs have income limits and may require you to live in the home for at least 5 years to avoid repayment.
2. Your lender may not accept assistance programs: Some lenders don’t accept assistance programs, so you may not be able to use one even if you qualify. It’s important to find the right mortgage lender who meets your needs. 
3. You could pay more in the long run: Most loans require repayment after a certain number of years, which means you may end up paying more in the future. 
4. Closing can take longer: Using down payment assistance can complicate the closing process, as you may need to wait for the funds to arrive or have a second underwriting process.
5. There may be property requirements: Most programs require that the home you purchase is your primary residence, meaning that you live there full-time. They may also have requirements that you live in the home for a specific amount of time, and if you move out before that time is up, you’ll need to repay any loans or grants. 

Is down payment assistance right for me?

If you meet income requirements and plan to stay in your home for years to come, then a down payment assistance program may be the right choice for you. If you don’t plan on staying in the home as your primary residence or don’t meet the qualifications, then down payment assistance may not be the best option. 

Next step: You can speak to a real estate agent or mortgage lender familiar with local programs. They can help you compare your options and see if DPA aligns with your financial goals.

FAQs about down payment assistance 

Who is considered a first-time homebuyer?

First-time homebuyers are individuals who have never owned a home or have not owned a primary residence in the last 3 years.

How much can you receive from down payment assistance programs?

The amount you receive from down payment assistance programs varies widely depending on the program’s details. For example, Fannie Mae’s HomePath Ready Buyer Program (a federal assistance program) offers up to 3% in closing cost assistance to first-time homebuyers purchasing a HomePath Property.

What is a second mortgage?

A second mortgage is a second loan on top of your first mortgage. Second mortgages are usually used to cover down payments or closing costs. It depends on the program when you need to repay these loans or if they are partially or fully forgiven.

Are there alternatives to down payment assistance?

There are several low and no-down-payment loans available that you may qualify for, like FHA loans, VA loans, and USDA loans. Other alternatives include a rent-to-own program or obtaining gift funds from family members.

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