What has to be covered
An FHA purchase at maximum financing needs 3.5 percent of the price as the borrower's minimum required investment, on top of closing costs.1 Down payment assistance is any arrangement that puts that 3.5 percent in without it coming out of your savings.
It is not a loophole. FHA has always allowed the investment to come from sources other than the borrower's own funds, and there is a documented framework for it — when a government entity funds the minimum investment, for instance, the lender has to establish that the entity took on a legally enforceable obligation to provide it, and hold the paperwork proving so.2
Not the seller, the agent, or anyone else with an interest in the sale. HUD measures the loan against the adjusted value, which it defines as the purchase price less any inducements to purchase.3 Money from that side of the table simply comes back off the price, so it buys you nothing.
That is worth knowing because it is the version people imagine when they hear “assistance” — and it is the one version that does not work.
The three shapes
Almost everything offered as down payment assistance is one of these, and the label on the brochure often does not tell you which.
- A grant. Money given, not lent. Nothing to repay and no second lien. The amounts tend to be smaller — commonly 2 to 3.5 percent on an FHA purchase.
- A forgivable second lien. A real lien recorded against the property, at zero percent, with no monthly payment, that is written off if you stay past a set period. Three years is a common term.
- A repayable second lien. A real loan with a real payment — typically amortised over ten years at a rate a couple of points above your first mortgage. It is not forgiven and it shows up in your monthly budget from day one.
All three exist on FHA purchases right now across our lending channels, in sizes from 2 percent up to 5 percent, some covering closing costs as well as the down payment. Which of them you are offered, and by whom, is the decision worth slowing down for.
What it does not change
Assistance changes where the down payment comes from. It does not change the loan underneath it. You still qualify as an FHA borrower, the property still has to appraise and meet FHA's requirements, and the mortgage insurance is the same as on any other FHA loan — with one consequence that catches people out, covered on the cost page.
These are purchase programs. None of them refinance an existing loan.
Ask any lender offering you assistance one question before anything else: is it a grant, a forgivable lien, or a loan I make payments on? If the answer takes more than a sentence, ask again. A borrower who does not know which of the three they have signed for is the normal case, not the unusual one.
Sources
These references support the factual explanations above. Where this page states a preference rather than a fact, it says so — those are our editorial judgement, not a claim that any one channel always costs less.
Next
Forgivable, deferred, or repayableTwo structures, two very different monthly payments, and the choice turns on one question about your life.What assistance actually costsIt is not free money, and the largest cost is the one nobody mentions.Before you sign for assistance
A grant, a forgivable lien and a loan with a monthly payment are not the same thing, and the paperwork often does not say which one you have. Send us what you were quoted and we will tell you what is actually being handed to you.