Sumii Jhingon

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Down Payment Assistance: Grants vs. Loans

Typically reserved for first time home buyers, although that’s not always the case, down payment assistance can help buyers gather up enough funds to buy and finance a home. These funds can be used for a down payment, closing costs or a combination of both. Closing costs can come in the form of one-time fees or recurring ones. One time fees are for things such as closing fees, an appraisal or credit report. Recurring charges are for items such as insurance or property taxes. Whichever the case, down payment assistance may also be used for these charges as well.

Down payment assistance may often place limitations on household or borrower income. This limitation is connected to the median income for the area. Income is documented by providing copies of paycheck stubs, tax returns or W2 forms. This income is then compared to the median income for the area where the property being purchased is located. Down payment assistance might also be available for certain geographical areas deemed underserved or low-cost. Such areas might be located in low-to-moderate income areas are in places where real estate is in relatively low demand.

However down payment assistance is used, the assistance can come in the form of a grant or a loan. With a grant, the funds are issued outright. The amount is typically listed as a percentage of the sales price but can range anywhere from three to five percent of the value of the home. With a grant, the funds do not have to be paid back. Having a grant forgiven most often means the borrowers must own the property for a minimum period of time, usually three years. After three years, the grant is forgiven and does not have to be repaid.

With a loan, the awarded amount does have to be repaid, unlike a grant. The attractive feature of a loan is the relatively low interest rate. Most down payment assistance loans carry rates that are below rates attached to a standard mortgage. Further, payments may also be delayed for an initial period of time, say up to three or five years. Borrowers can certainly make payments during this period, and many do, but it’s not a requirement. The drawback of waiting means interest is accruing on the balance, which results in the loan balance actually getting larger instead of smaller.

The types of loans and grants vary widely and can be administered by a local, county or state agency. Individual mortgage companies may also be required to be approved to issue these loans or the applicant will apply individually. If you’re thinking of buying a home and searching for a little more financial help, a down payment assistance program might be the best answer. Your mortgage company can help guide you through this process. It’s best not to apply for assistance on your own, let your loan officer help.

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