At a glance
- Types
- Grants and second loans
- Pairs with
- Conventional, FHA, VA, USDA
- Limits
- Income, price, location
Educational overview, not a loan offer. Requirements vary by lender and borrower.
Overview
Many state housing agencies, counties and cities offer down payment and closing cost assistance. Help comes as a grant, a forgivable loan or a deferred second loan, paired with a first mortgage.
Each program has its own income, price, location and education requirements, and only approved lenders can offer some of them.
How down payment assistance works
Down payment assistance, often called DPA, helps cover the cash a buyer needs at closing. Programs are run by state housing finance agencies, counties, cities, nonprofits and some employers, and each sets its own terms and funding. Some housing agencies also issue Mortgage Credit Certificates, which can let you claim a federal tax credit for part of the mortgage interest you pay, depending on your tax situation, rather than giving you cash at closing.
Assistance is almost always paired with a first mortgage from a lender that participates in the program, and the help usually takes one of these forms:
- Grant: money that generally does not have to be repaid.
- Forgivable second loan: recorded as a lien and forgiven over a set period if you keep living in the home.
- Deferred second loan: no monthly payment, but repaid when you sell, refinance or pay off the first mortgage.
- Repayable second loan: a second mortgage with its own monthly payment.
Who down payment assistance can fit
DPA is aimed at buyers whose income can support a mortgage payment but who have not built up much cash for closing.
It tends to fit less well for buyers who expect to move or refinance soon, since many second loans come due at that point.
Situations where assistance comes up:
- A first-time buyer with steady income and a solid rent history but limited funds for closing.
- A teacher, nurse or first responder in an area where an employer or state program focuses on those occupations.
- A repeat buyer using a program that does not require first-time status, or who fits one of its exceptions.
- A buyer purchasing within a program's price limit in a targeted neighborhood.
See also
Common assistance rules: income, purchase price and occupancy
Programs restrict which first mortgages they pair with and which lenders can offer them. A participating loan officer can check current eligibility, since rules and funding change during the year.
Every program writes its own rules, but most combine some of the same tests:
- Income limits, often based on area median income and household size.
- Purchase price limits by county or area.
- First-time buyer status, often defined as not having owned a home in a recent period, with exceptions in some programs.
- Primary residence occupancy, sometimes for a required number of years.
- Homebuyer education from an approved provider.
- Minimum credit scores and debt-to-income limits set by the program and the first-mortgage lender.
How assistance fits agency down payment rules
The first-mortgage program decides how assistance can be used. FHA will insure a first mortgage with a second lien from a government entity when the second is disclosed at application, its costs are not financed into the first mortgage, its payments are counted in your total mortgage payment, it gives you no cash back beyond refunds, and it meets FHA's other conditions. FHA treats assistance recorded as a lien on your home as secondary financing, not a gift or grant, even if it requires no regular payments or has features that forgive the debt.
Fannie Mae accepts grants from acceptable entities, such as government agencies, housing finance agencies, certain nonprofits, Federal Home Loan Banks and employers, but not from the seller or other interested parties, and it does not allow assistance funded through the first mortgage's pricing. Depending on the number of units and the loan-to-value ratio, a minimum contribution from your own funds may still be required. Repayable seconds from affordable housing programs fall under Fannie Mae's Community Seconds rules.
See also
Income and documents for assistance programs
Assistance programs often measure income differently from the mortgage underwriter. The lender looks at the income of the people on the loan to decide whether you can afford it; the program may count the income of everyone in the household, including adults who are not borrowers, to decide whether you are under its limit. That difference surprises many buyers, so ask early how your program counts income.
Expect to sign program affidavits about income, household size, first-time status and occupancy, and to provide a homebuyer education certificate. The second loan has its own note and recorded mortgage, so keep copies; you will need them when you sell, refinance or request a lien release after forgiveness.
Property types and occupancy for assistance
Assistance is designed for a home you will live in as your primary residence. Programs funded with HUD's HOME funds, for example, require the home to stay your principal residence through an affordability period, and some or all of the help can be recaptured if you sell or move out early. Renting the home out can trigger repayment in many programs.
Eligible property types vary. Many programs accept single-family homes, townhomes and condos that meet the first mortgage's standards, while some exclude manufactured homes or two- to four-unit properties. New construction can raise timing issues when funds must be reserved by a deadline.
What assistance programs can do
Used well, assistance can make the move from renting to owning possible sooner:
- Reduces the cash needed at closing, which can shorten the time it takes to gather funds.
- Grants and forgivable loans may never need to be repaid if you follow the program terms.
- Seconds with payments deferred until you sell, refinance or pay off the first mortgage usually add no payment to your debt-to-income ratio; when payments begin after a shorter deferral, the first-mortgage program may count the future payment.
- Programs often pair with conventional, FHA, VA and USDA first mortgages.
- Homebuyer education requirements give first-time buyers a structured introduction to the process.
See also
Funding gaps, repayment terms and paired first mortgages
Not all assistance is a grant. A lien on your home is a debt even when it has no payment, and deferred seconds usually come due in full when you sell, refinance or pay off the first mortgage. That can limit a future refinance or reduce the cash you take away from a sale.
- Funding is limited and can close partway through the year, and reservations often carry strict deadlines.
- Income, price and occupancy rules can make some homes or households ineligible.
- Compare the full cost of the paired first mortgage and fees with and without assistance, since terms vary by program.
- If the first mortgage is funded through tax-exempt mortgage revenue bonds, or you receive a Mortgage Credit Certificate, a federal recapture tax can apply under certain conditions if you sell within the first nine years.
- Program paperwork can add steps to closing.
Talk it through with Ruben
Assistance compared with HomeReady, Home Possible and state agency programs
Assistance is one piece of a purchase plan rather than a loan type of its own. The table shows how it relates to programs it is often confused with. Many buyers use more than one of these at once, so it helps to see each layer separately.
Assistance can often be layered with a program like HomeReady or Home Possible, subject to each program's rules on subordinate financing. Your loan officer can show how each combination affects the cash you need and the total you will owe.
Scroll sideways
| Feature | State or local assistance | HomeReady and Home Possible | State housing finance agency programs |
|---|---|---|---|
| What it is | Help with funds to close | Conventional first mortgage options | First mortgage programs, often paired with assistance |
| Run by | Housing agencies, local governments, nonprofits | Fannie Mae and Freddie Mac, through lenders | State housing finance agencies, through participating lenders |
| Income limits | Usually | Yes, tied to area income | Yes, usually by county or metro area |
| Occupancy | Primary residence | Primary residence | Primary residence |
| Repayment | Grant, forgivable or repayable | Standard mortgage terms | Depends on the option chosen |
Assistance scenarios: a forgivable second, a deferred second, an employer
Illustrations of real decision points, not offers:
- A first-time buyer with good credit and little cash pairs a state assistance program with an FHA loan, after confirming the help comes from a government entity whose terms FHA accepts.
- A buyer choosing between a forgivable second and a deferred second picks the forgivable one after learning the deferred loan would come due if they refinanced in a few years.
- A household with an adult child living at home learns that the program counts that child's income toward its limit, even though only the parents are borrowing.
- A buyer whose employer offers homebuying help confirms with the loan officer that an employer grant is an acceptable source under Fannie Mae's rules.
See also
Finding and using assistance
Timelines depend on the program's reservation and review rules as much as on the lender.
- Check your state housing finance agency and your city or county housing office; HUD lists homebuying programs by state and HUD-approved housing counselors.
- Ask a participating loan officer which programs they can offer and whether funds are open now.
- Complete the required homebuyer education before closing.
- The lender reserves the assistance, underwrites both loans and submits the file for the program's approval or compliance review, often against deadlines.
- At closing you sign the first mortgage, the assistance documents and any recorded lien.
- Keep your paperwork and track forgiveness dates or repayment triggers.
Assistance myths about grants, first-time status and lenders
Assistance programs vary so much that general assumptions often turn out wrong.
- Myth: Assistance is always a grant. Reality: Many programs are second mortgages that must be repaid or are forgiven only over time.
- Myth: Only first-time buyers can get help. Reality: Many programs require it, but some serve repeat buyers, certain occupations or targeted areas.
- Myth: Any lender can offer any program. Reality: Most programs work only through participating lenders.
- Myth: I can rent the home out later. Reality: Most programs require you to keep living there, and renting can trigger repayment.
- Myth: The seller can fund my down payment help. Reality: Agency rules bar sellers and other interested parties from funding grants toward your down payment; seller credits toward closing costs are a separate, capped item.
Common questions
13 questions
Do I have to be a first-time buyer to get down payment assistance?
Many programs are for first-time buyers, but some serve repeat buyers or specific professions. Your loan officer can check what applies to you.
Is down payment assistance always available?
No. Many programs open in funding windows and close when funds are reserved. Your loan officer can check which programs are open today.
Do I have to repay down payment assistance?
It depends on how the help is set up. A true grant usually does not have to be repaid, but assistance recorded as a lien on your home is a loan, even if it has no monthly payment or is forgiven over time. Deferred second loans typically come due when you sell, refinance or pay off the first mortgage, and any monthly payment counts when your loan is underwritten. Your loan officer can show you each program's terms before you choose.
How do I find assistance programs near me?
Start with your state housing finance agency and your city or county housing office, since most programs are run at the state or local level. HUD lists homebuying programs by state and can connect you with a HUD-approved housing counselor who knows local options. Because many programs work only through participating lenders, ask your loan officer which ones they can offer.
Can I use down payment assistance on a home I will not live in?
Generally no. Assistance programs are designed for a home you will live in as your primary residence. For example, programs funded through HUD's HOME program require the home to remain your principal residence for a set affordability period, and some or all of the help can be recaptured if you sell or move out early.
Does down payment assistance count as a gift?
It depends on how the help is structured and on the first-mortgage program. FHA treats assistance recorded as a lien on your home as secondary financing, not a gift or grant, even if it has no regular payments or is forgiven over time. Fannie Mae treats funds from acceptable entities that do not need to be repaid as grants. The label matters because each type has different documentation rules and can affect your required contribution.
Can assistance cover all of the cash I need to close?
Sometimes, but not always. FHA lets secondary financing from a government entity help meet your minimum required investment when it meets FHA's conditions. Fannie Mae may require a minimum contribution from your own funds depending on the loan-to-value ratio and property type. Many programs also cap their help, so you may still need money for an earnest money deposit, inspections or prepaid items. A loan officer can estimate what remains.
What happens to my assistance if I refinance later?
It depends on the program. Many deferred second loans come due when you refinance, so the payoff becomes part of the new transaction. Some programs will subordinate, meaning they agree to stay in second position behind your new first mortgage, under conditions they set. Forgivable seconds may still have a remaining balance until the forgiveness period ends. Ask the program administrator about its rules before you apply for a refinance.
Can I use a Mortgage Credit Certificate along with down payment assistance?
Sometimes. A Mortgage Credit Certificate, or MCC, is not cash at closing; it is a certificate from a state or local housing agency that lets you claim a yearly federal tax credit, figured on IRS Form 8396, for part of your mortgage interest. Federal tax law does not allow an MCC on a home when any of its financing comes from mortgage revenue bonds, so it cannot be paired with a bond-funded first mortgage, and some agencies limit combining an MCC with their own assistance. Where both are allowed, ask your loan officer how the programs fit together and a tax professional how the credit and any recapture tax would apply to you.
Can I combine more than one assistance program?
Sometimes. Some programs allow layering, such as a state program alongside a city grant, while others prohibit combining their help with any other assistance. Every lien still has to fit the first-mortgage program's rules; Fannie Mae, for example, counts all subordinate liens when calculating the combined loan-to-value ratio. Your loan officer can check whether the programs you are considering allow stacking and how the totals work.
Can the seller or my real estate agent provide down payment assistance?
Not as a grant toward your down payment under most agency rules. Fannie Mae does not accept grants from the property seller or other interested parties, and FHA does not allow interested-party contributions to be used for your minimum required investment. Sellers can usually contribute toward closing costs within each program's limits, which is different from assistance. Ask your loan officer how a proposed seller credit will be treated.
Can my employer help with my down payment?
Possibly. Fannie Mae lists an employer as an acceptable source of grant funds for a principal residence, and it has separate rules for employer assistance programs. Some employers partner with housing agencies or offer their own help. Ask your human resources office what is available, and give the loan officer the program terms early so the funds can be documented correctly.
What does it mean when assistance is forgivable?
A forgivable loan is recorded as a lien, but the balance is reduced over a set period, often in yearly portions, as long as you keep meeting the program's terms, such as living in the home. When the period ends, the remaining balance is forgiven and the lien can be released. If you sell, refinance or move out before then, the unforgiven portion may have to be repaid. Read the forgiveness schedule before closing.
This page explains how this type of loan generally works. Programs, guidelines and availability vary by lender and change often. Contact Ruben to see which options are available for your scenario today.