One of the biggest obstacles to homeownership, particularly for middle- and low-income households, is coming up with the down payment. The high cost of rent, utilities, car ownership, health insurance, education, and groceries often leaves little room in the budget to save money for a down payment.
If that’s what’s been keeping you from buying a home, you should work to find and apply for first-time homeowner grants. They can enable you to purchase a home with zero down payment.
How first-time homeowner grants work
First-time homeowner grants work in conjunction with low-down-payment mortgages. For example, FHA mortgages typically require a down payment of 3.5% of the purchase price of a home. There are conventional mortgage programs that allow you to buy a home with a down payment of just 3% of the purchase price.
First-time homeowner grants are designed to cover the down payment requirement. The combination of the grant plus the first mortgage will enable you to purchase a home with a zero down payment.
These programs are for first-time homebuyers, however some define a first-time homebuyer as someone who has not owned a home within the past three years. In addition, the grants are available for the purchase of owner-occupied homes only. That means that you cannot use them for the purchase of a second home or investment property.
Grants have limits. For example, the actual dollar amount of the grant is typically capped at a certain amount. If the limit is $9,000 for example, the maximum purchase price of a property using a 97% first mortgage, would be $300,000 ($300,000 x .03 = $9,000).
There are almost always income limits. Those limits can vary from county to county, and are usually based on the median household income in the area. For example, grant availability may only apply to households whose annual incomes are below the median. Others may go with a higher number, such as 150% of the median.
In addition, as a result of participating in a grant program, you will usually be required to take a home-buyer education course of some type. That may involve either attending a session at a remote location, or completing an online course.
In most cases, the grants are actually loans. In a typical scenario, you’ll have to make a small monthly payment, but the balance of the grant may be forgiven if you have made payments consistently and on time for say, five or 10 years. Since the interest rate on the program is subsidized, it will typically be well below market rates.
Finding grant programs that are available in your area
There are probably more grant programs available in your area than you have ever imagined. The best way to get information on program availability is to contact your local government office, including your state, county, and municipality. They are often the sponsors of the grant programs, or can also recommend private source grant programs as well.
Still another source are mortgage lenders themselves. Since they typically work with various grant programs in the area, they will be aware of those that are most popular.
The US Department of Housing and Urban Development (HUD) can help you to locate down payment assistance programs provided by non-profit agencies in your state.
An excellent online source for grant programs is the Home buyer programs by state page from the mortgage resource website HSH.com. It provides a listing of the hundreds of programs that are available in each of the 50 states.
IMPORTANT: Not all grant programs are available at all times. For example, local government grant programs are typically financed by bond issues. If the bond issue is for $10 million statewide, the grant program will end when the funds from that bond issue have been exhausted. If that happens, you will have to wait until there is another bond issuance, and funds have been replenished. You can check with the grant sponsors to find out when that will happen.
What Costs Do First-time Homeowner Grants Pay?
This will vary based on the actual program that you want to participate in. But some of the costs covered by grant programs includes the down payment, closing costs, and even renovations and repairs to the property.
Review the Requirements to Be Sure that You Qualify
In addition to the fact that first time home buyer grants typically impose income limits on participants, it’s also very important to understand that you must also qualify for the first mortgage to purchase the home.
Each mortgage type, whether it is conventional or FHA, will have certain guidelines that you must meet. These will include acceptable credit, employment, income, and debt-to-income ratios. The requirements will be similar to what they would be if you were applying for a mortgage but not participating in a grant program.
But in addition to the loan requirements of the first mortgage, the grant program may have additional requirements. Exactly what these will be, will depend upon the specific grant that you are participating in. Generally speaking however, if you can qualify for the first mortgage, you should be good to go with the grant as well.
Locate lenders who will work with the grant program—not all do!
If you find a grant program that you’re particularly interested in, the next step is to find a participating lender. Not all lenders participate in all grant programs, and some lenders don’t work with any of them at all.
You can usually get assistance in this area through the program itself. They will usually have a list of local lenders who work with the program.
Once you locate a participating lender, it will be very important that you work with a mortgage loan officer who actually has experience working with that particular grant program. Since every grant program is different, the loan officer will have to have a specific understanding of that program.
Complete all required paperwork and supporting documentation promptly
Mortgage applications themselves require a significant amount of paperwork, as well as supporting documentation. Be aware that taking advantage of a grant program is likely to require additional paperwork. Exactly how much, and what the requirements will be, will depend upon the individual program.
It’s important that you are on board with this process. You’ll need to complete all paperwork fully and accurately. You will also need to supply any required supporting documentation promptly.
It’s also important that you are completely truthful in regard to any information that you supply. Mortgage lenders have verification processes designed to weed out inaccurate information. If they find any in connection with your application, you may not be permitted to participate in the grant program.
Observe all homeowner requirements
Grant programs often have strict requirements in regard to your ownership and occupancy of the property. As noted earlier, they are available for owner occupied properties only. For that reason, they may restrict your ability to vacate the property in favor of a tenant, at least for a certain number of years.
They may also prohibit the use of the property for commercial purposes, transient use (boarders and other temporary occupants), the number of people living in the home, as well as the storage of dangerous substances.
If you purchase a home using a grant program for the down payment, it’s important that you comply with all homeowner requirements. Much as is the case with a regular mortgage, the possibility exists that the issuer of the grant could call in the loan early, as a result of non-compliance.
If you would like to purchase a home, and coming up with the down payment can be a real problem, look into the many grant program options available in your state.