Down Payment Assistance Programs (DAPS) are special loan programs that can help a first-time home buyer purchase without a down payment. First-time home buyers, as defined by the U.S. Department of Housing and Urban Development (HUD), are those who have not had any ownership interests in a home within the past three years. If you fit into this definition, your chances are increased for obtaining help through grants and other down payment assistance programs.
Typically, you will find two types of DAPS available: non-profit organizations, or the 501 (c) (3) programs, and city-, county- or state-backed programs. To facilitate a first-time home buyer purchase without a down payment using non-profit DAPS requires the assistance of the seller as well. The city-, county- and state-backed programs use the security of a second mortgage.
In simplest terms, a home buyer using a non-profit program, such as Nehemiah or HART (Housing Action Resource Trust), has the down payment paid for by the home seller. A seller is prohibited by federal housing regulations from giving the down payment money directly to the buyer, so a third party (non-profit organization) accepts the funds and gives the buyer most of it for the down payment. Typically the organization will take one percent or a flat fee for completing the transaction.
State and local down payment assistance programs, like Access 2000 (California) and CHFA (California Housing Finance Authority) loans are usually secured with a “silent” second mortgage. They are dubbed “silent” since there are no payments required by you initially, and a number of programs will forgive the loan once you have lived in the home for ten to 20 years. To qualify for these DAPS, you must be eligible for FHA (Federal Housing Administration) financing, as these programs use FHA loans.
FHA loans allow first-time home buyers to purchase a home with as little as three-and-a half percent down, in contrast to the 20 percent required by most traditional loans. Generally, though, you will be required to purchase private mortgage insurance (PMI) when making a down payment of less than 20 percent. Veterans and active military personnel can acquire an FHA loan with a zero-percent down payment.
Another option is to draw money from an IRA or 401(k) retirement account. A loan from your retirement plan is not limited to first time home buyers, and in the case of a 401(k) plan, the money may be tax- and penalty-free when it is used to buy real estate. You can take out a maximum of $10,000 once in your lifetime from an IRA account, for the purchase of a first-time home without incurring the 10 percent early withdrawal penalty fee, but standard taxes still apply. Additionally, a first-time home buyer can purchase without a down payment by borrowing or having the money gifted from a friend, family member or business partner.
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