Down Payment Assistance for Home Buyers

Summary: Where can first-time home buyers find down payment assistance in the current economy. In this article, we will talk about the different programs and options that are available in 2009.

So, you’ve decided to enter the housing market and buy your first home. You’re excited about finding a place of your own, so you start talking to mortgage lenders. It doesn’t take long to realize they’re all saying the same thing — you need to make a down payment on the house to qualify for a loan. The only problem is, you haven’t been saving up for a down payment. What do you do?

Well, you have a few options. And that’s what we are going to talk about in this lesson. Let’s start with current events. Here’s the latest information about the government tax credit / down payment assistance program:

Using the Home Buyer Tax Credit as Down Payment

Editor’s Note: There is much confusion about this subject, mainly because the government keeps changing the rules. We will continue to update this blog post as needed. Here’s the background information on the tax credit being used as down payment assistance — or not.

Currently, there’s a government program in place that gives a tax credit to first-time home buyers. The credit could be up to $8,000, and a “first-time” buyer is defined as anyone who has not owned a home within the last three years. Recently, this program was modified to include a form of down payment assistance for home buyers. Basically, the tax credit can now be obtained up front (in the form of a bridge loan) and put toward the down payment on a house.

Update (6/18/09): People who use FHA loans to pay for their homes can put the home buyer tax credit toward their closing costs, but not toward their 3.5% down payments. If your down payment exceeds 3.5%, then you can monetize your tax credit to pay the extra amount. But you must come up with the 3.5% out of pocket. You are also allowed to get down payment assistance from friends, family, non-profits, to help you cover the 3.5% portion. This is according to recent guidelines issued by the Department of Housing and Urban Development (HUD).

Other Forms of Down Payment Assistance

In a perfect world, buyers would be able to cover their mortgage down payments out of their own pockets. That’s what I recommend, because it puts you in a positive equity situation right from the start (without having to pay people back). Studies have also shown that people who pay their own down payment, without any form of government assistance, are much less likely to default on their loans and face foreclosure.

On the other hand, people who use government-subsidized down payments are twice as likely to default on their mortgage loans down the road.

But we don’t live in a perfect world. We live in a world where people often need down payment assistance to help cover the costs of a mortgage loan. So here are some other strategies for buying a home with less money down:

• Buy a less-expensive home. Let’s be real here. If you can’t afford the down payment on that $250,000 home, then you can’t afford the home. Period. I don’t know why people are so inclined to buy more than they can afford these days. By downsizing the houses you are considering, you will also downsize the mortgage amount. And “magically,” the down payment amount shrinks as well. Imagine that.
• Consider FHA loans. The primary benefit of getting an FHA-insured mortgage loan is the smaller down payment that comes with it. For a conventional loan (that is not backed by the government), most lenders will require 20% down. But with an FHA loan, you can put as little as 3.5% down. If the down payment on the FHA loan exceeds 3.5%, you use your tax credit to cover the excess amount (see the June update to this article above).
• Get help from your family. This is an acceptable form of down payment assistance on most loans, and you can’t be the “rates” when you borrow money from family members.
• Look into state programs. Your state may have programs in place designed to help home buyers, particularly first-time buyers. There are other government entities that offer similar programs to buyers who meet certain requirements. I would start by doing a Google search for “down payment assistance” or “home buying grant” followed by your state’s name. Check out your state’s department of housing as well. I did a Google search like this for the state where I live, and I found several programs.

We are researching this topic further to provide additional information. I will update this blog post with any new programs I come across.