Most bank are requiring you to put in a down payment when buying a home. Gone are those days where you can get zero down payment or borrow second mortgages as your down payment if you are obtaining conventional mortgages.
Nowadays, it’s either you saved up for it, borrow from your retirement funds (401k, IRA, etc) or qualify for FHA loans, which offers zero to 3.5% down payment for qualified low to moderate income earners.
One down payment assistance that most people overlooked are the ones offered by local government agencies such as your city or county.Â A lot of people are not aware that most cities or counties offer housing assistance to qualified prospective home owners in the form of a mortgage credit certificate or down payment.
Typically, these down payment assistance are in a form of a grant and qualified home buyers can receive a specific amount, but it varies depending on the agency’s program. As you know, grants are funds that you do not have to pay back for as long as you meet the program requirements.
Our family was actually one of the beneficiary of this type of grant when we bought our first home in 1995: I was one of the co-owners along with my parents and my sister. We were not aware about the program and it just happened that there was a new community being built and the builder was the one who told us about this generous offer by the city. We took a look at the home and it was pretty decent size and very affordable price for a starter home. We qualified for the FHA loan and the city down payment assistance so it was really a big help and we ended up buying the house. The only thing that we paid for were the closing cost and any potential upgrades.
At that time, the city gave us $20,000 for the down payment Â but it comes with a lot of restrictions and caveats.
In order to receive the down payment assistance, the following test must be met:
- You must meet the income requirement – Only families in the low-to-moderate income qualify for the assistance. The income requirement varies depending on the city or county offering the program and the number of members in a household. Some cities with a high standard of living would have a very high income threshold. As an example, a $80,000 income earner with 5 family members may still be considered as a moderate income and would qualify for the grant in high standard of living areas but may not in other areas.
- You must be a first-time homebuyer– program are only open to first time home buyers. You must not own a house for the past three years.
- You must purchase the home in the locality – This is pretty much self-explanatory, cities or counties only offer the assistance if you purchase the house in their own locality. This way they can get their money back through property taxes.
Key Features of the Program
Below are the key features of most of the home down payment assistance program. Again, some of the features may or may not be present but most programs carry the following features:
- Generous Amount – the amount of the housing assistance is pretty high. As stated before, in the city that we lived in, the amount was $20,000. Other cities may offer a higher amount depending on the standard of living in the area and the median price of the homes.
- It is a silent loan – the grant is really a loan, but it is considered a silent loan because there is no monthly payment required and no interest are charged or accrued. If you live in the house and completed the terms of the grant, you do not have to pay for the loan. In essence, this is called a forgivable loan.
- Longer Grant terms – Grants usually have a stipulation where home owners mustÂ Â agree to live in the home for a number of years (5 to 15 years) in order to fully take advantage of the grant. If they were to sell the home or move Â prior to the time limit, they will be required to re-pay the loan.Â If after living for a number of years and you decided to sell the home before the grant term, you may only pay a pro-rate amount depending on the number of years. Again, these varies on the agency’s program as some may require you to pay the full amount plus penalties and interest even if you live there for a number of years.
- Home must be your primary residence during the grant term – you cannot rent it to someone else. Every year, the city will send a residency confirmation that you have to complete, sign, and return to the city as attestation that you are still living in the house. And as part of the contract, the city may stop by at the house to verify that you are actually living in there. In our case, we have to sign a form every year attesting that we still live in the house.
- You have to pay back the loan when you refinance during the grant term– one big hindrance for homeowners is when the house appreciate in value and you want to take out a home equity loan or refinance. Because the down payment is really a second mortgage loan, you have to pay it back when you refinance even if you meet the residency requirement. When our home appreciate in value, we wanted to refinance it and take some cash out. However, the loan officer told us that we may have to pay back the silent loan in order to do so.
Some of these programs are not advertised so you really have to inquire with the city or county. You can also go on the agency’s website to see if they offer the program. The housing assistance has some inherent disadvantages so you really have to be sure that this is what you want. Some people really can’t live 15 years while some may want to take advantage of the appreciation by refinancing and cashing out on the home.