How down payment assistance works with an FHA loan

Down payment assistance is help with the cash you need to buy a home, and in most programs it comes as a second loan that you sign at the same closing as your FHA first mortgage. A housing agency, or a program that works with government agencies, puts up some or all of your down payment and, in some programs, part of your closing costs. You still take a regular first mortgage and still have to meet its rules. The assistance is then either paid back or, if you meet the program’s conditions, forgiven.

That is most of it. The rest is the detail that decides whether a program fits you, and that is where buyers get tripped up.

Why FHA and assistance go together

FHA loans already accept a smaller down payment than most conventional loans. The catch is that you still have to bring that money to closing, along with closing costs. Under HUD’s FHA rules (opens in a new tab), a second loan on the home can come from a government body or an eligible nonprofit, as HUD allows, and HUD’s own FHA lending system lists the buyer’s closing costs and minimum required investment among the things that money can pay for. That is why most assistance programs are built around FHA loans.

The program usually has its own rules for the first mortgage as well, so its rules sit on top of FHA’s. That is also why the lender you choose has to take part in the specific program. You cannot bring any program to any lender.

Who provides the money

Assistance comes from state and local housing finance agencies, from cities and counties, and from national programs that work with government agencies. Each one sets its own rules on:

• your credit score;
• your household income, where the program has a limit (several have none);
• the price of the home and the type of home;
• the kind of first mortgage;
• where you buy;
• whether you must be a first-time buyer, and whether you need a homebuyer education course.

HUD’s buying-a-home page (opens in a new tab) points to homebuying programs in each state, and the CFPB suggests telling your lender about any assistance you plan to use. Our down payment assistance page lists the programs we work with and has an estimator that checks the main rules for you.

How it works, step by step

1. Talk and get a quote. A loan officer reviews your income, savings, credit and price range, and which programs fit the home and the area.
2. Apply once. You apply for the first mortgage and the assistance together. Because the assistance is a loan, you get its own loan estimate.
3. Reserve the assistance. The loan is registered with the program, which confirms its funding before closing. If your program asks for a homebuyer education course, you take it before closing.
4. Close. You sign the first mortgage and the assistance at the same closing.
5. Afterwards, you follow your program’s rules for repayment or forgiveness.

The two kinds: forgivable and repayable

Some assistance is forgivable. You make no payments on it, and it is cancelled after you meet the program’s conditions, such as living in the home for a set time or paying your first mortgage on time. Other assistance is repayable: you pay it back monthly, or in one sum when you sell, refinance or pay off the first mortgage.

Either way, if you sell or refinance before the assistance is forgiven or paid off, whatever is left is usually repaid at that point. I wrote a separate article on how the two kinds compare, because the difference matters more than most buyers expect.

What assistance does not change

• The first mortgage still has to fit. Your credit, income and debts are reviewed for the FHA loan as on any other.
• The home must be your main home. Assistance is for buying the home you will live in, not a rental or a second home.
• You owe more than one loan. Read the terms of both loans before you sign, not only the first mortgage.
• Program money can run out. Funding and terms change, so a program that fits today is confirmed again before closing.

Questions to ask before you choose a program

• Is the assistance forgivable or repayable, and exactly what are the conditions?
• What happens if I sell or refinance in the first few years?
• Does it cover closing costs, or only the down payment?
• Do I need a homebuyer education course, and where do I take it? The CFPB’s housing counselor search (opens in a new tab) lists HUD-approved agencies near you.
• Can I add a documented gift from family? Often yes, but each program sets its own rules.

Frequently asked questions

Is down payment assistance free money?

No. In most programs it is a second loan. Some programs forgive it after you meet their conditions, such as living in the home for a set time; others are paid back monthly, or when you sell or refinance.

Do I have to be a first-time buyer?

Not always. Several of the programs we work with have no first-time buyer rule. Others are for first-time buyers, with some exceptions, and most programs count you as first-time if you have not owned a home in the past three years.

Can I use assistance with a loan other than FHA?

Some agencies offer programs that also work with VA, USDA or conventional loans. Most of the programs we work with today are built around FHA loans.

How do I see which programs might fit me?

Use our down payment assistance estimator. It asks a few questions about the home, your household and your credit, and shows “may fit”, “ask us” or “probably not” for each program, with the reasons. A licensed loan officer then checks the programs against your full details.