One of the biggest obstacles to home ownership for first-time buyers is saving enough money for a down payment. Especially over the last five years or so, low inventory coupled with increased costs in building materials have made the leap into home ownership a more expensive challenge.

But there’s some good news, too!

The expectations related to how much home buyers should ante up for a down payment have changed along with more accepting attitudes around down payment assistance programs.

The New Age of Down Payments

First, the old adage about putting 20% down is an outdated expectation. Mortgage lenders no longer require such a large buy-in to qualify for a home loan. Instead, some loan programs enable borrowers to start with as little as 0-3% down to qualify.

Next, a variety of down payment assistance programs with more inclusive income limits provide opportunities for home buyers to expand their purchasing power and finance less of the overall cost of the home to make home ownership more affordable.

How Does it Work?

There are two basic aspects of down payment assistance programs to consider:

1. Qualifications
2. Repayment
   

While down payment assistance is not limited to first-time home buyers, most programs are aimed at this group. The key takeaway here is that each program will have unique qualifications for eligibility that may include:

• Income limits – household income must be below an established amount
• First-time home buyer status – this often includes an exception for divorced with a dependent child or a displaced homemaker
• Location of the home – for example, the house must be located within city limits or perhaps in a rural township
• Type of home – such as single-family, condo, or duplex
• Home inspection – must pass safety codes
• Amount of the borrower’s contribution to the down payment – there may be a minimum percentage that has to be met, like 1% or 3%
• Completing home buyer education
• And other potential criteria, depending on the details of any specific program
  

If approved for participation, each down payment assistance program has different repayment conditions. Some programs consider the assistance similar to a grant that is forgiven after an established time frame, such as 5 years. Other programs require repayment of the assistance without interest upon sale of the home, if the owner refinances, or if the owner no longer occupies the residence themselves. Another type of program includes repayment upon sale of the home plus a small percentage of any gains or profit.

While some down payment assistance programs rely on federal support, most are actually funded locally.

Sample Scenario

Sometimes, the best way to understand the process is to see sample numbers in action.

The income limits for down payment assistance are subject to change annually and vary by location throughout the state. In Dane County:

• 1-person household has an income limit of no more than $68,500
• 2-person household has an income limit of $78,250
• 3-person household has a limit of $88,050
• These limits continue going up based on household size
  

In this scenario, a first-time home buyer with 3% of their own funds contributed to the down payment could see something like this:

$300K purchase price
- $9K (3% down payment from buyer)
- $35K (Home-Buy Loan program, City of Madison)
- $10K (Down Payment Plus program, 5-year forgivable grant)
$246K (mortgage loan amount)

As you can see from this example, multiple programs can be stacked for greatest impact. Based on a recent WHEDA interest rate, these two down payment assistance programs save the borrower $268/month on principal and interest payments.

Benefits for Buyers and Sellers

Not all financial institutions are willing to look into down payment assistance programs as part of the mortgage process because they are extra work for the lender. However, Lake Ridge Bank mortgage professionals are always willing to look into opportunities that may help our customers meet their goals. If we think a buyer may qualify for a down payment assistance program, we will share ideas and ask if you would like us to get more information.

By utilizing down payment assistance programs, buyers have options for reducing monthly payments or for increasing the total amount they can afford. It could also mean the difference between living on the edge of month-to-month budget restrictions or leaving a little extra cushion in the bank for emergencies.

At the same time, these programs benefit sellers in many ways as well. At certain price points, programs like this can bring a larger pool of buyers into the market.

Studies show that homeownership helps families, neighborhoods, and communities thrive. If you think you might qualify for a down payment assistance program to help get over the hump of up-front purchasing costs, ask your mortgage lender for more information. We often don’t need to go through the full application process to just get a feel for where things stand. A quick conversation can help determine whether it’s worth more investigation.

If you are in the market for a new home, contact a mortgage lender at Lake Ridge Bank for help establishing your price range and understanding if special loan programs like down payment assistance might help you meet your goals.