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:
- Grants which do not have to be paid back
- 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.
Example: the PenFed Foundation Dream Makers Grant. (Editor's note: Since the publication of this story, the Dream Makers program has permanently closed.)
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 often as a 0%-interest second loan, but some may accrue interest and some may be amortizing loans. These programs typically range from 5-year to 30-year loans with varying repayment terms, which may start immediately or kick in after a predetermined period.
Example: the NeighborWorks Blackhawk Region Down-Payment Assistance Program in Beloit, WI.
Deferred or silent second programs postpone repayment of the down payment assistance until the borrower sells, refinances, rents or moves out of the home. Buyers who plan to live in the home for several years will benefit most from the home's appreciation in value.
Example: the City of Napa's First Time Homebuyer Programs.
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.
Example: the City of Austin "Standard" Down Payment Assistance Program.