Down Payment Assistance Can Help Responsible Borrowers
For many individuals, now is a great time to buy a home: mortgage rates are low and house prices are lower than they’ve been in years. But gathering enough funds for the down payment, fees, and closing costs is a challenge for some families. Although no down payment mortgages are primarily a thing of the past, if you’ve done your homework, and are financially ready to be a homeowner, you may be eligible for down payment assistance from a variety of sources. However, Freddie Mac does require that borrowers contribute roughly five percent from their own funds to be used for down payment and closing costs.
Some first-time homebuyers may be eligible for assistance in the form of grants and tax credits. The U.S. Department of Housing and Urban Development (HUD) has a directory of state, county, local and municipal programs on their website. These sources have thousands of dollars of homebuying assistance available to well-qualified, mortgage ready borrowers. Each program has different requirements, and assistance may be limited to first-time homebuyers and/or low- and moderate-income homebuyers. Assistance can range from a few hundred to a few thousand dollars, depending on your needs, your qualifications, and where you choose to purchase your home.
HUD provides grant assistance at the state and local levels through the HOME Investment Partnerships Program and the Community Development Block Grant Program. The American Dream Downpayment Initiative and the Neighborhood Stabilization Program are among the many homebuyer assistance programs HUD helps fund.
Here are some key terms to remember when researching down payment assistance programs:
- 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. Income limits may apply.
- Second mortgage loans. The most common down payment source, many second mortgage loans available through state or local governments and community-based organizations have low or no interest rates, and the payments are deferred over certain timeframes.
- Tax credits. Certain states and local governments, including housing finance agencies, issue mortgage credit certificates. These reduce the amount of federal income tax you pay, thus giving you more available income up-front to make your down payment or pay for closing costs.
In Virginia, for example, the state Department of Housing and Community Development assists homebuyers with funds from the federal HOME program. The organization has $2.5 million available in 2010-2011 to help as many as 300 families become homeowners. The program offers down payment and closing cost assistance to individuals and families whose income is at or below 80 percent of the Area Median Income (AMI). A homebuyer meeting the income eligibility requirements may receive up to 10 percent of the purchase price of a home to go toward the down payment, plus up to $2,500 to pay for closing costs such as attorney’s fee, title insurance, and taxes.
Freddie Mac also recommends that potential homebuyers take a homebuyer class or workshop, which are offered around the country at nonprofit housing counseling organizations. Participants learn valuable information such as:
- Can I afford a mortgage payment and home maintenance and repair costs?
- What are the pros and cons of the different types of mortgages?
- What does it take to be a successful homeowner?
- What would be my rights and responsibilities as a homeowner?
You can find more information on Freddie Mac’s website, in the About Homeownership section. Determining if there is a program to fit your circumstances requires some effort and research. But because the stakes are so high, and the goal – buying a home you can afford and keep – so important, the process is worth every minute you invest in it.
(This is the second of a two-part series offering tips on how to successfully navigate the homebuying process. Part 1 discussed how today’s housing market has created a rare opportunity for working families with stable incomes and good credit to become homeowners.)
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