Rumors in real estate spread like wild fire, especially when there is a “free money” involved. Downpayment grants are becoming increasingly popular, but with information passed around, sometimes the facts get a little foggy.
When you hear folks talk about grant programs, downpayment assistance, or first time homebuyer programs, they are all talking about the same thing.
Here’s how grants work:
There are programs that will gift buyers money to help cover their downpayment and/or their closing costs when they are purchasing a home. Typically, there is no first time home buyer status required. To qualify, your credit has to be in good standing, you cannot exceed certain income requirements, and typically there are limits on the purchase price of the home (usually around $300k).
You do get free money and dont have to pay it back. BUT there’s always a catch (like with anything!)
Your interest rate will be significantly higher (typically 1% higher) and you will have more up front fees while purchasing. With higher interest, you will pay more on a monthly basis for a mortgage payment, versus a market interest rate (without a grant).
Have you ever heard of a free lunch? It just doesn’t exist. Downpayment assistance programs, or first time home buyer programs are no exception.
You have to be a first time homebuyer to qualify.
Most programs do not require you are a first time buyer, there are endless programs out there that are offered to buyers no matter how many times they have purchased a home.
It will cover all of the up-front downpayment and closing costs.
Not true. Typically, a buyer will have remaining closing costs that they will have to pay for. It is nearly impossible to buy a home with no money out-of-pocket. As a buyer, talk with your lender and agent about how much to have saved for closing.
You can refinance as soon as you close to get a lower interest rate.
False. Buyers are now required to wait several years to refinance after purchasing. The government would have no way of offsetting the large amount they are gifting unless they are making it up in some other capacity. (a.k.a. higher rates)
Who does downpayment assistance make the most sense for?
Dont get me wrong, downpayment assistance is a beautiful thing. It has gotten alot of people into homes who would’ve otherwise never been able to do so. Like with anything, it has it’s downfalls.
If you are someone who cannot picture yourself saving the thousands of dollars it takes for a downpayment and closing costs, downpayment assistance may be a way to get you into a home.
If there is any way for you to save enough cash for a downpayment, even if it is a low amount (3%-5%), I recommend not using a grant program. You will save more money in the bigger picture with a lower interest rate.
To see what makes sense for your situation, please dont hesitate to reach out.