While the USDA and VA mortgage programs require zero down payment when purchasing a home, the two most popular government-backed mortgage programs, FHA and Fannie Mae/Freddie Mac, do require down payments. The minimum FHA down payment amount is 3.5% of the purchase price and in most cases you need 5% of the purchase price as a down payment for Fannie/Freddie loans. Because many families have trouble saving up 3.5-5.0% of the purchase prices, there are down payment assistance (DPA) programs that have popped up all over the country.
Not Federal Programs
There is no DPA program sponsored by the federal government that works throughout the country. Rather all current government-backed DPA programs are sponsored by either city, county, or state governments. Because of this, there are no uniform rules when it comes to DPA programs — the availability and terms of DPA programs depend on the city, county, or state you live in.
DPA programs are usually not free
In the vast majority of cases, DPA programs are not “free money”. Rather, it is common for the programs to pay for themselves by charging significantly higher interest rates than the rates one would get by coming up with a down payment on one’s own (through savings or help from family). The problem with significantly higher interest rates is it could cost a borrower vastly more in interest paid over the life of the loan than the DPA money they are getting up front. In addition to higher interest rates, some DPA programs also charge up front fees that roll into the new loan. In addition, some DPA programs are just additional loans that need to be paid back rather than forgivable grants.
Because of these things, it is extremely important for borrowers to ask a lot of questions before diving into a local DPA program.
Alternatives to DPA programs
First, there are the USDA and VA mortgage programs to check out. Second, in many cases borrowers who are looking at FHA or Fannie/Freddie loans would be better off saving up a little longer or getting gift funds from family/friends to cover the down payment rather than use the local DPA program. Gifts from family are acceptable sources of down payment money (even if one intends to pay the gifter back eventually). If avoiding a DPA program means getting a significantly lower interest rate, the extra effort often pays off in the long run.
Contact us on our home purchase page to learn more or to get directed to a lender who could help you get pre-qualified for a home purchase loan.