Down-payment grants and assistance loans

#Grant, forgivable or deferred: what “assistance” means

Programs use the word “grant” loosely. Read the documents for one question: is there a note and a lien? If there is, it is a loan, whatever the brochure calls it.

Texas shows all of these side by side. TSAHC offers a grant that “never has to be repaid,” a forgivable second lien forgiven after 3 years if you don’t sell, refinance or move out, and a deferred second lien repaid when the first mortgage is sold, refinanced or paid off. TDHCA’s My First Texas Home offers a 0% deferred loan due on sale or refinance, or a 0% loan forgiven after 36 months if you keep living in the home.

#How assistance affects your mortgage

Combined loan-to-value. A second loan stacks on top of the first, so total debt can exceed the price. Fannie Mae allows a combined loan-to-value of up to 105% with an eligible Community Seconds loan, and Freddie Mac allows 105% with Affordable Seconds. On a $360,000 home, the 105% limit leaves room for $18,000 of borrowing above the price — the part that pays closing costs.

Debt-to-income. Under Fannie Mae’s rules, a Community Seconds loan whose payments are deferred for at least 5 years doesn’t add a monthly payment to your debt-to-income ratio. An amortizing second does.

Mortgage insurance. Assistance covers cash, not risk: with a small down payment you still pay PMI or FHA mortgage insurance on the first loan, and the CFPB notes that many state and local programs require mortgage insurance.

Equity. Owing more than the home is worth at the start means selling in the first few years could require bringing cash to closing, especially once a sales commission is paid.

#What happens when you sell or refinance

#Where legitimate assistance comes from

Fannie Mae’s list of eligible Community Seconds providers is a good map of who offers real help:

• State housing finance agencies and other state agencies.
• Counties, cities, towns and similar local governments.
• Nonprofits recognized under section 501(c)(3).
• Federal Home Loan Banks, through their affordable housing programs.
• Employers, for their own employees.

The seller, builder or real estate agent generally can’t be the source. Start with your state’s programs — the first-time buyer programs guide explains how to find your housing finance agency — and ask lenders which local programs they work with. Many programs require a homebuyer education course and set income and price limits.

#How to spot a “grant” scam

Scammers also invent official-sounding agencies; the FTC gives the “Federal Grants Administration” as an example of one that doesn’t exist. Legitimate down-payment help is applied for through a participating lender or the agency itself, alongside your mortgage application. If you aren’t sure, call HUD’s housing counseling line at 800-569-4287 and ask a HUD-approved counselor.

#Questions to ask before you accept

• Is this a grant or a loan, and is a lien recorded against the home?
• If it is forgivable, over what period, and is it forgiven all at once or a little each year?
• What makes it due early — selling, refinancing, renting the home out, moving out?
• Does the program require a particular first mortgage, rate or lender, and how does that rate compare with a loan without assistance?
• Are there income limits, purchase-price limits or a minimum credit score?

Ask for a Loan Estimate with the assistance and one without, and compare the rate, fees and cash to close. Assistance that pushes you into a costlier first mortgage can cost more over time than it saves up front; the affordability calculator shows how the payment changes.