Let’s take a look at how the 3 most common types of programs work.
What are homeownership programs?
Programs include 0% loans, grants and tax credits for eligible homebuyers that can help them achieve the down payment faster, cover closing costs and get you into a home sooner than you would have otherwise.
Who offers these programs?
Homebuyer programs are managed and funded from an array of sources.
How do you qualify?
Homeownership programs are for owner-occupant buyers only — no investment properties. You must qualify for an FHA, VA, USDA or Conventional mortgage and complete homebuyer education.
Your occupation can help give you a boost. There are often additional benefits, or even entirely separate programs, for educators, protectors, health care workers, veterans and households with disabled members.
Do you have to be a first-time homebuyer?
No. Some, but not all, programs require you to be a first-time homebuyer. It’s important to know that a first-time homebuyer is defined as someone who hasn’t owned a home in three years. So, if you owned in the past but are renting now, you may be a first-timer again! Plus, across our database of programs 41 percent don’t have a first-time homebuyer requirement.
3 most common types of programs
1. Down Payment Assistance Programs
The largest category of programs – 72% to be exact – are down payment assistance and closing cost programs. Down payment assistance (DPA) is an umbrella term for programs offered by federal, state, county or local government agencies, nonprofits and employers. DPA programs come in 2 primary forms:
1. Grants which do not have to be paid back
2. Second mortgage loans with varying payback or loan forgiveness provisions.
Down payment assistance grants
Grants are gifts at closing provided by an eligible third party to help cover the cost of some or all of your down payment or closing costs. They do not have to be repaid by the homebuyer, do not incur a lien on the property being purchased, and have no associated note or deed.
Second mortgage programs
Many down payment programs come in the form of a second mortgage, or subordinate lien, with varying payback provisions.
Repayable DPA programs provide down payment funds at closing with a 0%-interest second loan.
Forgivable second mortgage programs forgive some or all of the DPA amount. When and how much of that down payment help is forgiven may vary, but it’s common for a percentage of the loan to be forgiven each year for a predefined number of years. However, if the program’s conditions are not met – for example, the buyer moves out of the home – the loan must be repaid, sometimes with interest.
2. Affordable First Mortgages
Many larger housing finance agencies, particularly at the state level, offer first mortgages to accompany their down payment assistance programs. They are often funded by state housing finance agencies and may subsidize portions of the interest to offer rates below what the normal market can provide, helping lower your buying costs and monthly payments. They may also have reduced closing costs and fees and waive mortgage insurance requirements.
The USDA also has 2 first mortgage programs, the Rural Direct Loan and the Rural Guaranteed Loan, both primarily used to help low- and moderate-income individuals or households purchase homes in rural areas. Funds can be used to acquire, build (including purchase and prepare sites and provide water and sewage facilities), repair, renovate or relocate a home.
3. Mortgage Credit Certificates (MCC)
This annual federal income tax credit is designed to help first-time homebuyers offset a portion of their mortgage interest on a new mortgage as a way to help qualify for a loan. As a tax credit, not a tax deduction, the MCC helps reduce your annual taxes dollar for dollar.
The mortgage credit allowed varies depending on the state or local government that issues the certificates, but (in most cases) it is capped at a maximum of $2,000 per year by the IRS. MCCs can often be used alongside another down payment program.