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Down Payment Assistance Programs Explained

Down payment assistance programs provide grants, forgivable loans, or deferred-payment second mortgages to help homebuyers cover the down payment and closing costs required for a mortgage. These programs are administered by state housing finance agencies, local governments, employers, and Federal Home Loan Banks, and they are designed primarily for low- to moderate-income households and first-time homebuyers. DPA can be combined with FHA, conventional, and other first mortgage products, subject to program-specific income limits, occupancy requirements, and potential recapture provisions.

Key Takeaways

  • Every state has a Housing Finance Agency (HFA) that offers one or more DPA programs, typically providing assistance as forgivable loans, deferred-payment second mortgages, or grants to income-qualified borrowers.
  • DPA structures include outright grants (no repayment), silent second mortgages (due on sale or refinance), and forgivable loans (forgiven over a set period of owner-occupancy, typically three to ten years).
  • Income limits for DPA programs are usually 80% to 120% of area median income (AMI), and many programs require the borrower to be a first-time homebuyer (no homeownership in the past three years).
  • FHA allows 100% of the down payment to come from eligible DPA sources, making it the most compatible program for borrowers relying entirely on assistance funds for down payment.
  • Recapture provisions on bond-funded programs may require repayment of a portion of the subsidy if the home is sold within a specified period and certain income or profit conditions are met.
  • Employer-assisted housing programs typically offer $5,000 to $15,000 as forgivable loans tied to continued employment, and can be stacked with other DPA sources.
  • Federal Home Loan Bank (FHLB) Affordable Housing Program funds provide grants through participating banks and credit unions, adding another layer of available assistance.
  • Multiple DPA programs can often be combined (stacked) on a single transaction, potentially covering the entire down payment and a portion of closing costs.

How It Works

How to Find and Apply for DPA Programs

The first step is identifying available programs in the area where the borrower intends to purchase. State HFA websites list their programs, eligibility requirements, and participating lenders. HUD maintains a list of local homebuying programs by state at hud.gov. Borrowers can also contact local housing authorities, community development organizations, and HUD-approved housing counseling agencies, which maintain current information about available programs in their service areas. Participating lenders, specifically those approved by the state HFA or local program administrator, are essential to the process because DPA loans typically must be originated through an approved lender who has been trained on the program’s requirements.

Application for DPA is typically processed simultaneously with the first mortgage application. The borrower applies through a participating lender who handles both the first mortgage and the DPA component. The lender underwrites both loans together, ensuring the borrower meets the income limits, property eligibility requirements, and any first-time buyer criteria. In many cases, a homebuyer education course is required before closing, either in person or online through a HUD-approved provider. The DPA and first mortgage close simultaneously, and the DPA funds are applied at the closing table.

How Forgivable Loan Forgiveness Works

Forgivable DPA loans include a promissory note and deed of trust (or mortgage) recorded against the property, just like the first mortgage. The note specifies the forgiveness schedule, typically straight-line forgiveness over the program’s required occupancy period. A $10,000 forgivable loan with a five-year forgiveness period reduces the outstanding balance by $2,000 each year the borrower continuously occupies the property as their primary residence and maintains the first mortgage in good standing.

If the borrower sells, refinances (unless the program allows subordination), transfers ownership, or converts the property to a non-owner-occupied use during the forgiveness period, the unforgiven balance becomes due and payable. After the full forgiveness period has elapsed, the balance is zero, and the lien is released. Some programs require the borrower to request the lien release; others release it automatically. Borrowers should track the forgiveness timeline and ensure the lien is properly released from the title when forgiveness is complete .

How DPA Interacts with Combined Loan-to-Value (CLTV) Limits

When DPA is structured as a second mortgage (silent second or forgivable loan), the combined loan-to-value ratio (CLTV) includes both the first mortgage and the DPA second lien. Lenders and agencies have maximum CLTV limits that cap the total financing. FHA allows a CLTV up to 105% when the second lien is from an eligible government or nonprofit source. Fannie Mae typically allows CLTV up to 105% for Community Seconds programs and up to 97% CLTV for other eligible subordinate financing. These limits determine how much DPA can be stacked on top of the first mortgage .

For example, a borrower purchasing a $200,000 home with a 97% conventional first mortgage ($194,000) and a $6,000 DPA second mortgage has a CLTV of 100%. If the program allows CLTV up to 105%, there is additional room for closing cost assistance. If the CLTV limit is 97%, the DPA and first mortgage combined cannot exceed $194,000, meaning the DPA would need to come from the gap between the purchase price and the first mortgage LTV limit. Understanding CLTV limits is critical when structuring transactions with multiple layers of financing.

Related topics include first-time homebuyer programs and benefits, using gift funds for your down payment, buying a home with significant student debt, and special borrower situations: a decision guide.

Key Factors

Factors relevant to Down Payment Assistance Programs Explained
Factor Description Typical Range
DPA Structure Type
Income Limits
First-Time Buyer Requirement
CLTV Limits

Examples

Scenario: First-time buyer using state HFA forgivable second with FHA first mortgage
Outcome: The DPA covers the entire 3.5% down payment ($7,700) plus an additional $1,100 toward closing costs. The CLTV is approximately 100.5% ($216,015 first + $8,800 second = $224,815 / $220,000 purchase price), within FHA's 105% CLTV limit. The borrower moves in with minimal cash outlay. If the borrower stays in the home for five years, the $8,800 DPA second is fully forgiven. If the borrower sells in year three, $3,520 remains unforgiven and is due from sale proceeds.

Scenario: Borrower stacking employer assistance with city DPA program
Outcome: The $17,500 in combined DPA covers the 3% down payment ($8,250) plus $9,250 toward closing costs. The CLTV with the $10,000 city second lien is ($266,750 + $10,000) / $275,000 = 100.6%, which must fall within the first mortgage program's CLTV limit. The employer grant is typically not recorded as a lien and does not affect CLTV. The borrower closes with nearly zero out-of-pocket cost. The city's silent second is due if the borrower sells or refinances, and the employer grant vests fully after three years of employment.

Scenario: Repeat buyer qualifying for DPA in a targeted census tract
Outcome: Despite not being a first-time buyer under the standard three-year definition (the short sale was four years ago, so the borrower actually does qualify), the targeted census tract exemption provides an additional pathway. The borrower receives the $7,500 DPA, applies it toward the down payment on an FHA loan, and closes the purchase. The forgivable loan will be fully forgiven after seven years of continuous owner-occupancy.

Common Mistakes to Avoid

  • Assuming DPA programs are no longer available or are fully depleted
  • Not working with a participating lender approved by the DPA program
  • Ignoring recapture provisions on bond-funded DPA programs
  • Failing to complete required homebuyer education before closing
  • Not disclosing DPA funds to the lender during the application process
  • Selling or refinancing during the forgivable loan forgiveness period without understanding repayment requirements

Documents You May Need

  • Proof of household income (pay stubs, W-2s, tax returns) to verify eligibility within program income limits
  • Documentation of first-time homebuyer status (signed affidavit or certification) or targeted area exemption
  • Homebuyer education course completion certificate from a HUD-approved provider
  • Purchase contract for the subject property showing purchase price and property address
  • Bank statements (most recent two to three months) showing available personal funds for any required borrower contribution
  • Employer-assisted housing program documentation (if applicable), including terms of the assistance and vesting schedule
  • DPA program application completed through a participating lender
  • Government-issued identification for all borrowers
  • Property eligibility documentation confirming the property is within the DPA program's geographic boundaries

Frequently Asked Questions

What is down payment assistance?
Down payment assistance is funding provided by government agencies, nonprofits, employers, or other eligible entities to help homebuyers cover the down payment and sometimes closing costs required for a mortgage. DPA can take the form of grants (no repayment), forgivable loans (forgiven over a set period), silent second mortgages (due on sale or refinance), or low-interest second mortgages with monthly payments.
Do I have to be a first-time homebuyer to qualify for DPA?
Many DPA programs require first-time homebuyer status, defined as not having owned a home in the past three years. However, not all programs have this requirement, and exceptions exist for borrowers purchasing in targeted census tracts, veterans, and others depending on the specific program. Some programs are available to any income-qualified buyer regardless of prior ownership.
Do I have to pay back down payment assistance?
It depends on the program structure. Grants do not require repayment. Forgivable loans are forgiven after a set period of owner-occupancy (typically three to ten years) and do not require repayment if you stay in the home through the forgiveness period. Silent second mortgages are due on sale or refinance. Repayable second mortgages require monthly payments. Each program specifies its repayment terms, and borrowers should review them carefully before closing.
Can I use DPA with an FHA loan?
Yes. FHA is the most commonly paired program with DPA because FHA allows 100% of the down payment to come from eligible assistance sources and permits CLTV up to 105% with government or nonprofit second liens. The borrower does not need to contribute personal funds toward the down payment when eligible DPA covers the full amount.
What are the income limits for DPA programs?
Income limits vary by program and are usually expressed as a percentage of the area median income (AMI), commonly 80% to 120% AMI. The specific limit depends on the program, the geographic area, and household size. Some programs in high-cost areas have higher limits. Income is typically verified using the same documentation submitted for the mortgage application (pay stubs, W-2s, tax returns).
Can I combine multiple DPA programs?
In many cases, yes. Borrowers can often stack multiple DPA sources, such as a state HFA program with a city program or an employer grant. The combined assistance must not exceed the total allowable amount under the first mortgage's CLTV limits, and each program must independently approve the borrower. Coordination between programs and the first mortgage lender is essential to ensure all requirements are met.
What is a recapture provision on a DPA program?
A recapture provision, applicable to certain bond-funded DPA programs, is a federal tax requirement that may require the borrower to repay a portion of the mortgage subsidy if the home is sold within a set period (typically five to nine years) and the borrower's income has increased above program limits or the borrower realizes a profit on the sale. The maximum recapture is the lesser of 50% of the gain or 6.25% of the original loan amount. Selling at a loss eliminates recapture liability.
How do I find DPA programs in my area?
Start with your state's Housing Finance Agency website, which lists statewide programs and participating lenders. HUD maintains a directory of local homebuying programs at hud.gov. Local housing authorities, community development offices, and HUD-approved housing counseling agencies can identify city, county, and neighborhood-specific programs. A participating lender experienced with DPA in your area is often the most efficient resource for identifying all available programs.
Does DPA affect my interest rate?
DPA itself does not change the interest rate on the first mortgage in most programs. However, some state HFA programs bundle DPA with a specific first mortgage product that may carry a rate slightly above market in exchange for the assistance. Borrowers should compare the total cost (interest rate on the first mortgage plus any DPA repayment terms) against a market-rate mortgage without DPA to determine the net benefit. In most cases, the DPA benefit substantially exceeds any rate premium.
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