The Truth About Down Payments and Down Payment Assistance
With interest rates low (though rising), more credit available to qualified borrowers, and employment up, it's a good time to buy a home if you are financially ready and able. But many potential homebuyers see the down payment as a hurdle too high to jump. It might be lower than they think, however, and they might be eligible for a financial boost.
The Down Payment Doesn't Need to be 20 Percent of the Purchase Price
A survey conducted by Wells Fargo Home Mortgage and Ipsos Public Affairs found that 36 percent of respondents believe a 20 percent down payment is required to purchase a home. Not so.
In fact, the average down payment for single-family homes bought in the first quarter of this year was 14.8 percent, down from 15.5 percent a year ago, according to RealtyTrac. About 40 percent of homebuyers put down less than 10 percent. Freddie Mac has long allowed for 5 percent down, and our Home Possible AdvantageSM mortgage is available to qualified borrowers with as little as 3 percent down, which can even be raised by a gift from a family member or employer or a grant from a government agency.
Financial Help With the Down Payment Is Available
Pulling together enough money for a down payment may be a challenge. But you might not have to go it alone – many state, county, and city governments offer financial assistance to people in their communities who are well qualified and ready for homeownership. Requirements vary, but if you're eligible you could receive down payment assistance ranging from a few thousand dollars to larger amounts, depending on your needs, your qualifications, and where the home is located.
The U.S. Department of Housing and Urban Development (HUD) provides grants to state and local organizations through the HOME Investment Partnerships Program and the Community Development Block Grant Program. The Neighborhood Stabilization Program, for example, is among the many homebuyer assistance programs that HUD helps fund. To find the programs in your state, go to HUD's on-line listing or the handy new tool from Down Payment Resource.
State and local housing finance agencies (HFAs) administer many of these programs, and we work with many of them. Freddie Mac even offers an enhanced 3-percent-down mortgage product, HFA AdvantageSM, for use through these agencies. The National Council of State Housing Agencies (NCSHA) offers a state-by-state listing of HFAs. The National Association of Local Housing Finance Agencies (NALHFA) provides local-level program information.
The three main types of down payment assistance are grants, second mortgage loans, and tax credits.
- Grants – Grants are funds that you do not have to pay back as long as you own and occupy your home for a certain period of time.
- Second mortgage loans – The most common down payment source, many second mortgage loans offered by state and local governments have low or zero interest rates, and the payments are deferred over a specified time span and, in many cases, the loan is completely forgiven over time.
- Tax credits – Certain states and local governments, including housing finance agencies, issue mortgage credit certificates, which reduce the amount of federal income tax you pay. This makes more money available upfront for your down payment or closing costs.
Depending on the program, assistance may be limited to first-time homebuyers and/or low- and moderate-income homebuyers. And homebuyer education counseling may be required. (It would be helpful in any case.)
Get Some Coaching
Finding the right program to meet your circumstances will take some research, but it's worth the effort. Again, help is out there.
- Your lender or real estate professional is a good source of information. (Housing professionals can find materials on FreddieMac.com to help potential borrowers explore down payment assistance options).
- Freddie Mac Borrower Help Centers and Borrower Help Network deliver free counseling services across the country. The HUD-approved counselors can help you:
- Increase your financial skills through our CreditSmart® curriculum.
- Understand the responsibilities that come with homeownership.
- Assess which mortgage products might best suit your needs.
- Learn about the down payment and closing cost assistance programs in your area.
- Taking a class or workshop on what it takes to buy and keep a home is time well spent. Freddie Mac recommends that potential first-time homebuyers take at least one – and, as noted, some of the agencies that provide down payment assistance require counseling to qualify. Many not-for-profit housing organizations offer them.
- And an array of resources and tools on My Home by FreddieMacSM offer insights into homebuying and homeownership. Among them: information on down payment options and assistance programs, videos with advice from housing professionals, and a calculator to help you figure out how much home you can afford.
Equipped with knowledge and some help with the down payment, many households today are finding that homeownership is now within reach.
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