Down Payment Assistance

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One of the biggest obstacles to buying a home is not always the monthly mortgage payment—it is coming up with the down payment, closing costs, prepaid taxes, homeowners insurance and other expenses required at closing.

Down payment assistance (DPA) can help qualified homebuyers reduce the amount of money they need to bring to closing.

Fairhope Mortgage offers access to multiple down payment assistance options that can be combined with eligible FHA, conventional and USDA mortgages. Depending on the loan program and borrower qualifications, assistance may be available for approximately 3%, 3.5% or 5% of the home's purchase price.

Down payment assistance is not one single loan program. Assistance may be structured as a grant, a forgivable second mortgage or a repayable second mortgage. Program availability, credit requirements, income restrictions, property eligibility and repayment terms vary.

Some programs are also available to repeat homebuyers and borrowers who exceed the income limits commonly associated with traditional down payment assistance programs.

How Down Payment Assistance Works

Down payment assistance provides additional funds that can be used with an eligible first mortgage.

Depending on the program, those funds may help pay for:

• Down payment
• Closing costs
• Prepaid property taxes and homeowners insurance
• Initial escrow deposits
• Other eligible costs associated with purchasing the home

The amount and permitted use of assistance depend on the specific program.

For example, on a $300,000 home:

3% assistance = $9,000

3.5% assistance = $10,500

5% assistance = $15,000

That does not necessarily mean the buyer receives cash or that every dollar can be used for any purpose. Assistance must be applied to eligible costs in accordance with the first mortgage and DPA program requirements, and excess DPA generally cannot be paid to the borrower as cash at closing.

Three Common Types of Down Payment Assistance

1. Grant Assistance

A grant can be one of the simplest forms of down payment assistance because there generally is no traditional second mortgage requiring monthly payments.

Depending on the program, grant assistance may be available with FHA or conventional financing and may cover some or all of the required down payment and/or eligible closing costs.

Some grant programs have income limits or other eligibility requirements, while certain programs provide exceptions based on factors such as first-time homebuyer status, occupation or property location.

Even when assistance is described as a grant, borrowers should review the specific program terms carefully. Certain programs may contain an early-payoff or minimum-loan-duration requirement.

2.   Forgivable Second Mortgage

A forgivable second mortgage places a second lien on the property, but typically requires no monthly payment and may carry a 0% interest rate.

The balance is forgiven after the borrower satisfies the program's requirements for a specified period.

Depending on the program, forgiveness may require the borrower to:

• Make the required number of consecutive on-time mortgage payments
• Continue occupying the property as a primary residence
• Avoid refinancing or paying off the first mortgage during the forgiveness period
• Meet other program-specific requirements

Forgiveness periods vary by program.

A forgivable second can be an excellent option for a buyer who expects to remain in the home long enough to satisfy the forgiveness requirements.

However, “forgivable” does not mean the second mortgage disappears at closing. Selling, refinancing or paying off the mortgage before the required forgiveness period may cause some or all of the assistance to become due.

3.    Repayable Second Mortgage

Another option is a second mortgage that must be repaid.

The DPA funds are provided at closing, but the buyer also signs a second mortgage. Depending on the program, that second mortgage may have its own interest rate, loan term and monthly payment.

Repayable DPA can sometimes provide more assistance or offer more flexible eligibility requirements than a grant or forgivable program.

The tradeoff is that the second mortgage payment may need to be included when determining the borrower's debt-to-income ratio.

Fairhope Mortgage compares the first mortgage and DPA together so buyers can understand the complete financing structure—not simply the amount of assistance offered.

FHA Down Payment Assistance

FHA financing normally requires a minimum 3.5% down payment for borrowers meeting applicable FHA credit requirements.

FHA rules permit the required investment to come from several acceptable sources, including certain gifts, grants and eligible secondary financing.

That makes FHA particularly well suited for down payment assistance.

Depending on the DPA program and borrower qualifications, assistance may be available at approximately:

3.5% of the purchase price

or

5% of the purchase price

A 3.5% assistance program may potentially cover the FHA minimum down payment.

A 5% assistance program can potentially provide enough assistance to cover the 3.5% minimum down payment plus additional eligible closing costs.

Actual eligibility and use of funds depend on the specific DPA program and FHA requirements.

Learn more about FHA financing on our FHA Loans page.

Conventional Down Payment Assistance

Conventional financing can also be combined with eligible down payment assistance.

Certain conventional mortgage programs allow qualified borrowers to purchase a primary residence with as little as 3% down.

Eligible assistance may come from grants or approved subordinate-financing programs.

This can be particularly attractive to borrowers who qualify well for conventional financing but would prefer to preserve their savings instead of using a large portion of their available cash for the down payment.

Conventional DPA eligibility can depend on factors including:

• Credit profile
• Income
• Area Median Income requirements
• First-time homebuyer status for certain programs
• Property type
• Occupancy
• Automated underwriting approval
• The specific conventional first-mortgage program

Some conventional DPA programs have income limits, while others contain exceptions or use different eligibility criteria.

Learn more about conventional financing on our Conventional Loans page.

USDA Down Payment Assistance

USDA is different from FHA and conventional financing because an eligible USDA Guaranteed Loan can already provide up to 100% financing.

That means a qualified USDA borrower may not need a down payment at all.

So why combine USDA with down payment assistance?

Closing costs.

Even with 100% financing, a homebuyer can still have expenses such as lender and title charges, homeowners insurance, prepaid interest, tax and insurance escrow deposits and other eligible costs.

An eligible DPA program may help reduce those costs.

USDA eligibility is based partly on household income and the location of the property. A home does not necessarily need to be located far into the countryside to qualify; many communities outside larger urban centers may be USDA eligible.

USDA borrowers must meet the applicable household-income requirements, regardless of whether a particular DPA program has separate income restrictions.

Learn more about USDA financing on our USDA Loans page.

Combining Down Payment Assistance With Seller-Paid Closing Costs

This is where down payment assistance can become particularly powerful.

DPA does not necessarily have to pay every expense associated with buying the home.

A properly structured purchase contract may allow the seller to contribute toward eligible buyer closing costs, subject to the applicable mortgage guidelines and actual allowable costs.

For example, imagine a qualified buyer purchasing a $300,000 home with FHA financing.

The FHA minimum 3.5% down payment would be:

$300,000 × 3.5% = $10,500

If the buyer qualified for 3.5% down payment assistance:

DPA = $10,500

That could potentially provide the funds needed for the minimum down payment.

Now assume the purchase contract also provides a negotiated seller credit toward eligible closing costs and prepaid expenses.

Instead of using the DPA to cover both the down payment and all of the closing expenses, the transaction can potentially be structured so that:

DPA helps cover the down payment

Seller credit helps cover eligible closing costs and prepaid expenses

Borrower's cash can be preserved for reserves, moving expenses, repairs, furnishings and the financial responsibilities that come with owning a home.

The actual amount of seller contribution that can be used is limited by the applicable mortgage guidelines and the buyer's actual eligible costs.

Seller credits cannot simply be converted into cash for the buyer.

Seller Contribution Limits

FHA

FHA generally permits interested-party contributions of up to 6% of the sales price toward eligible closing costs, prepaid expenses and discount points, subject to FHA requirements.

Conventional

Conventional seller-contribution limits depend on factors including occupancy and loan-to-value ratio.

For many primary-residence conventional purchases with more than 90% financing, the maximum financing concession is generally 3% of the lower of the sales price or appraised value.

USDA

USDA generally permits interested-party contributions of up to 6% of the sales price toward eligible loan purposes.

These limits should not be confused with the amount a particular buyer actually needs. Seller credits generally cannot exceed eligible costs simply to generate cash back to the borrower.

Can Down Payment Assistance and Seller Credits Create a Very Low Cash-to-Close Purchase?

Potentially, yes.

When a buyer qualifies for DPA and the purchase contract includes sufficient allowable seller-paid closing costs, it may be possible to significantly reduce the buyer's required cash at closing.

In certain transactions, the combination can cover most of the normal down payment and eligible closing expenses.

However, buyers should not assume that “down payment assistance” automatically means “no money needed.”

Buyers may still need funds for items such as:

• Earnest money
• Home inspection
• Appraisal, depending on how the transaction is structured
• Costs exceeding available DPA or seller credits
• Reserves when required
• Moving and post-closing expenses

Every transaction should be calculated individually before a buyer makes an offer.

Who Can Benefit From Down Payment Assistance?

DPA is not only for someone who has no savings.

It can also make sense for a borrower who has money but would benefit from keeping more of it after closing.

Down payment assistance may be worth considering for:

First-Time Homebuyers

Saving for a down payment while paying rent can be difficult. DPA can shorten the time between deciding to buy and actually becoming a homeowner.

Repeat Homebuyers

Not every DPA program requires the borrower to be a first-time homebuyer. Depending on the program, someone who currently owns or previously owned a home may still qualify.

Buyers With Good Income but Limited Savings

A borrower can have sufficient income to afford the mortgage but not have accumulated enough liquid savings for the down payment and closing costs.

Buyers Who Want to Preserve Emergency Savings

Using every available dollar to purchase a home can leave a new homeowner financially vulnerable. Preserving cash after closing may be more valuable than making a larger down payment.

Buyers Facing High Closing Costs

Homeowners insurance, prepaid taxes, escrow requirements and other costs can make cash-to-close substantially higher than the down payment alone. DPA combined with seller credits can help address both sides of the equation.

Buyers Purchasing Before Selling Another Home

A repeat buyer may have significant equity in an existing home but limited liquid funds before that property sells. Some DPA programs do not require first-time homebuyer status.

When Down Payment Assistance May NOT Be the Best Choice

DPA is a financing tool—not automatically the best mortgage for every borrower.

We compare the DPA option against financing without assistance before recommending a structure.

DPA may not be the best option when:

The DPA Mortgage Has a Significantly Higher Interest Rate

Assistance programs sometimes carry different first-mortgage pricing than a standard FHA, USDA or conventional loan.

Receiving assistance today may not be worthwhile if the borrower pays substantially more in interest over the expected life of the loan.

The Borrower Can Comfortably Make the Down Payment

If using the borrower's own funds results in a meaningfully better interest rate or lower overall borrowing cost while still leaving adequate emergency reserves, standard financing may be better.

The Borrower Plans to Sell or Refinance Quickly

A forgivable second mortgage may become repayable if the home is sold or the first mortgage is refinanced before the forgiveness requirements have been completed.

A buyer expecting to relocate or refinance relatively soon should understand this before choosing a forgivable DPA structure.

The Repayable Second Creates Too Much Monthly Debt

If the DPA requires a monthly payment, that obligation may increase the borrower's debt-to-income ratio and monthly housing expense.

The buyer should evaluate the combined payment—not simply the payment on the first mortgage.

The Program Restrictions Do Not Fit the Buyer

Some programs have income limits, credit-score requirements, occupancy requirements, property restrictions, homebuyer-education requirements or other conditions.

The program with the largest advertised assistance amount is not necessarily the program that produces the best financing.

3% vs. 3.5% vs. 5% Down Payment Assistance

The best amount of assistance depends on the first mortgage and the buyer's needs.

3% Assistance

Often particularly useful with eligible low-down-payment conventional financing. It can potentially cover a 3% down payment when the first mortgage and DPA program permit the structure.

3.5% Assistance

A natural fit with FHA because FHA's standard minimum down payment is 3.5% for qualifying borrowers. It can also be available under other DPA structures.

5% Assistance

Can provide additional flexibility when the buyer needs help beyond the minimum down payment. Depending on the program, part of the assistance may be available for eligible closing costs.

More assistance is not automatically better. The interest rate, second-lien terms, monthly payment, forgiveness provisions and total cost of financing should all be compared.

How Fairhope Mortgage Evaluates Down Payment Assistance

Rather than placing every borrower into the same DPA program, Fairhope Mortgage evaluates the entire transaction.

We compare:

• FHA, conventional and USDA eligibility
• Available DPA amounts
• Grant versus second-mortgage options
• Forgivable versus repayable assistance
• Interest rates and mortgage insurance
• Income and credit requirements
• Monthly payments
• Seller-paid closing-cost opportunities
• Cash required at closing
• Long-term cost of the financing
• How long the borrower expects to own the home or keep the mortgage

The goal is not simply to obtain the largest amount of assistance.

The goal is to structure the mortgage that makes the most financial sense for the buyer.

Down Payment Assistance on the Gulf Coast

Fairhope Mortgage helps homebuyers evaluate down payment assistance throughout our lending markets, including Fairhope, Daphne, Spanish Fort, Foley, Gulf Shores, Orange Beach, Mobile and other communities throughout Baldwin County and Mobile County, as well as eligible markets in Alabama, Florida, and Louisiana.

Available DPA programs and requirements can change, so eligibility should be verified for the individual borrower, property and loan type.

Frequently Asked Questions About Down Payment Assistance

Do I have to be a first-time homebuyer?

Not necessarily. Some DPA programs are available to repeat buyers. Other programs or conventional first-mortgage products may impose first-time homebuyer requirements in particular circumstances.

Are there income limits?

Sometimes. Income requirements vary substantially by program. Some programs have Area Median Income limits, some provide exemptions from those limits, and some DPA structures do not impose a separate DPA income limit. USDA itself has household-income limits regardless of the DPA program used.

Does down payment assistance have to be repaid?

It depends. Assistance may be a grant, a forgivable second mortgage or a repayable second mortgage.

Does a forgivable second have a monthly payment?

Some forgivable DPA programs offer 0% interest with no required monthly payment, but the specific terms vary. The borrower must satisfy the applicable forgiveness conditions before assuming the debt will disappear.

Can the seller still pay my closing costs if I use DPA?

Potentially, yes. Seller contributions can generally be combined with eligible DPA, subject to the first-mortgage program's limits, the DPA program requirements and the amount of actual eligible costs.

Can I use DPA with an FHA loan?

Yes, when the assistance meets FHA requirements. FHA specifically permits acceptable grants and secondary financing as potential sources of the borrower's required investment.

Can I use DPA with a conventional loan?

Yes. Eligible conventional mortgages can be combined with qualifying grants and subordinate financing.

Why would I use DPA with USDA if USDA already requires no down payment?

Because zero down does not necessarily mean zero cash to close. Eligible DPA may help with closing costs and prepaid expenses that remain after the USDA first mortgage is established.

Can I receive 5% assistance if my loan only requires 3.5% down?

Potentially. Depending on the program, the remaining eligible assistance may be applied toward allowable closing costs or other eligible expenses. It cannot simply be taken as cash by the borrower.

Is the mortgage rate higher with down payment assistance?

It can be. DPA financing should always be compared with a standard mortgage because rates, pricing and second-mortgage terms can differ.

Can I refinance after using down payment assistance?

Usually the first mortgage can eventually be refinanced, but the effect on the DPA must be evaluated first. A forgivable second may become due if the first mortgage is refinanced before the forgiveness requirements have been satisfied.

Which Down Payment Assistance Program Is Best?

There is no single DPA program that is best for every homebuyer.

A buyer with strong credit who qualifies for conventional financing may benefit from a completely different structure than an FHA borrower who needs the full 3.5% down payment.

A USDA buyer may need no down-payment assistance at all but could benefit from help with closing costs.

And a borrower with sufficient savings may discover that a mortgage without DPA offers a lower overall cost.

Fairhope Mortgage can compare the available FHA, conventional and USDA options and show you:

• Estimated cash to close
• Available assistance
• Seller-credit opportunities
• First and second mortgage payments
• Interest rates
• Repayment or forgiveness requirements
• Estimated total monthly housing payment
• Advantages and disadvantages of using DPA

That allows you to decide based on the complete financing picture rather than an advertised assistance percentage.

Important Information

Down payment assistance programs are subject to borrower, property, credit, income, occupancy, underwriting and program eligibility requirements. Program availability, assistance amounts, interest rates, repayment requirements and forgiveness terms are subject to change. Not all borrowers or properties will qualify. Seller contributions are subject to applicable loan-program limitations and eligible closing costs. 

Down Payment Assistance Resourcs

• HUD — FHA Loan & Homebuying Information — Official HUD information about FHA-insured mortgages, including FHA's minimum down-payment requirements.
• HUD — FHA Single Family Housing Policy Handbook 4000.1 — Official FHA underwriting and program requirements, including acceptable sources of funds, gifts, grants, secondary financing and interested-party contributions.
• Fannie Mae — Down Payment and Closing Cost Assistance — Fannie Mae resources covering eligible down-payment and closing-cost assistance.
• Fannie Mae — Community Seconds — Official guidelines for eligible subordinate financing used for down-payment and closing-cost assistance.
• Fannie Mae — HomeReady Mortgage — Information about Fannie Mae's low-down-payment conventional mortgage program.
• Freddie Mac — Affordable Seconds — Official Freddie Mac information about eligible second mortgages used to assist with down payments and closing costs.
• Freddie Mac — Home Possible Mortgage — Information about Freddie Mac's low-down-payment conventional mortgage program.
• USDA Rural Development — Single Family Housing Guaranteed Loan Program — Official USDA information covering its 100% financing/no-down-payment mortgage program.
• USDA — Income and Property Eligibility — Official USDA resource for checking household-income and property-location eligibility.
• Consumer Financial Protection Bureau — Mortgage Closing Costs — Independent consumer information explaining mortgage closing costs and who may pay them.
• Consumer Financial Protection Bureau — Closing Disclosure — Consumer guidance for understanding the final costs and terms shown on a mortgage Closing Disclosure.

About the Author

Tom Kalagher | Founder & Branch Manager, Fairhope Mortgage

Tom Kalagher is the Founder and Branch Manager of Fairhope Mortgage, LLC, serving homebuyers, homeowners, and real estate investors throughout Alabama, Florida, and Louisiana. Based in Fairhope, Alabama, Tom specializes in FHA, VA, USDA, conventional, down payment assistance, DSCR, self-employed borrower, and other residential mortgage programs.

Tom works with borrowers throughout Baldwin County and Mobile, including Fairhope, Daphne, Spanish Fort, Foley, Gulf Shores, Orange Beach, and surrounding Gulf Coast communities. His approach focuses on helping borrowers compare available mortgage options, understand qualification requirements, and choose financing based on both the immediate cash needed to close and the long-term cost of the loan.

Tom Kalagher — NMLS #2028566
Fairhope Mortgage, LLC — NMLS #2561450
Fairhope, Alabama
Phone: (251) 391-5618
Website: Fairhope-Mortgage.com

Important: Mortgage programs, down payment assistance, interest rates, terms, and eligibility requirements are subject to change and borrower qualification. Not all borrowers or properties will qualify. This information is provided for educational purposes and is not a commitment to lend.