If you’re buying your first home, you may not be familiar with down payments. Before providing potential homeowners with a mortgage loan, most lenders require borrowers to make a down payment that amounts to anywhere from 3-20% of the sale price. If you don’t have enough savings to make a down payment, you may believe that buying a home is impossible. However, prospective homeowners may eventually be provided with a certain amount of down payment relief with the Downpayment Toward Equity Act, which is currently a bill in the U.S. Congress.
First created in 2021, the Downpayment Toward Equity Act is designed to provide buyers with assistance in building their wealth by purchasing a home. The purpose of this bill is to make it easier for renters to move to homeownership. If the bill is eventually passed through the U.S. Congress, it will allow first-time home-buyers to obtain a $25,000 grant that goes towards a down payment on a home. Keep in mind that this money is considered to be a grant, which means that it isn’t a tax deduction or loan.
The funds will be immediately applied when the transaction closes. As mentioned previously, you can’t apply for these funds at the moment since the Downpayment Toward Equity Act is still a bill. If you’re a first-time buyer who wants to purchase a home but doesn’t want to wait for this bill to become law, there are several other programs designed to provide assistance to first-time buyers. These programs include the National Homebuyers Fund as well as state and national grants that you might qualify for. This guide goes through the Downpayment Toward Equity Act and what it means for first-time buyers.
How to Apply for the Downpayment Toward Equity Act
At the moment, it’s impossible to apply for the Downpayment Toward Equity Act since the bill hasn’t gone through the U.S. Congress. If it does pass, you may be able to apply through your preferred lender or a government portal for the program. Even though the Downpayment Toward Equity Act is still a bill, the requirements needed to qualify for this grant have already been outlined and are detailed below.
Meet Income Limitations
First, there are some income limitations that you must meet to qualify for this grant. For instance, your income can’t be higher than 120% of the average income for the city you currently live in or the area where you want to purchase a home. This is a strict limitation, which means that you can’t receive any grant money if your income is higher than the 120% limit.
Be a First-time Homebuyer
The most important requirement for anyone who wants to qualify for the Downpayment Toward Equity Act is that they must be a first-time buyer. Keep in mind, however, that this doesn’t necessarily mean that you haven’t ever owned a home. If you haven’t been a homeowner for more than three years but have owned a home in the past, you’ll be able to qualify as a first-time buyer.
A First-generation Homebuyer
Along with being a first-time buyer yourself, it’s important that your parents or legal guardians have never before owned a home while you’ve been alive. If you’re currently married, your spouse must not have owned a home for the last three years. This particular requirements significantly reduces the number of people who are able to qualify for this grant.
Buy a Home as a Primary Residence
If you want to receive the $25,000 grant, you’ll need to purchase the home as your primary residence, which means that it needs to be the main place where you live for the majority of the year. You won’t be able to qualify for this grant if you’re using it as an investment property or intend to rent it out for most of the year.
Use a Federally Backed Mortgage
Another requirement is that the loan you obtain to purchase the home must be a federally backed mortgage, which is any mortgage that’s available through Freddie Mac or Fannie Mae. This type of mortgage is backed by one of the three primary federal government agencies that offer loans, which include the U.S. Department of Agriculture (USDA), the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA).
Keep in mind that the agency that backs the loan will insure the total amount of money the loan provides, which ensures that the lender is protected if the borrower defaults on the loan. Because the loan is backed by the government, lender aren’t taking on as much risk when providing one of these loans. It’s common for borrowers to benefit from low interest rates as well as minimal down payment requirements when obtaining one of these loans.
These loans are only available through private lenders. It’s also important to understand that not every lender will offer federally backed loans, which means that you may be required to do some research to identify a lender that offers the loan you’re looking for. Keep in mind that federally backed loans differ from conventional loans in several ways, which include:
- Conventional loans are considerable more popular than the alternative
- Federally backed loans come with differing cost structures, which extend to mortgage insurance requirements and upfront fees
- Conventional loans aren’t backed by government agencies, which means that lenders take on more risk when providing borrowers with a conventional loan
- Government-backed loans may have more specific requirements in comparison to conventional loans, which include the fact that USDA loans can only be applied to homes in a suburban or rural area
- Freddie Mac and Fannie Mae set rules for conventional loans
Because of how different each type of federally backed loan is from the others, it’s highly recommended that you take all of your options into account to make sure that you select the mortgage that best suits your needs.
If you’re getting ready to purchase a home for the first time, the following answers some of the more frequently asked questions regarding the Downpayment Toward Equity Act.
When Will the Downpayment Toward Equity Act Pass?
As of today, it’s not known when the Downpayment Toward Equity Act will pass since it’s still being discussed in the House and Senate. In order for a bill to eventually become a law, a vote needs to be held within the House and Senate. The bill must pass both chambers of congress before it can even be considered a law.
In the event that a bill gets through both votes, it will be sent to the president for the purpose of being signed. Once the bill is signed, it becomes law and can start being used by qualifying buyers. Keep in mind that bills like the Downpayment Toward Equity Act are frequently discussed in Congress before a vote is held. These discussions can range from weeks to months. The most recent hearing about this bill occurred in the Senate in late June.
What Will Happen if You Move Within Five Years?
Before you consider applying for this grant, it’s important to understand that some of the money must be repaid if you move out of your home in a short period of time. Because this money is a grant as opposed to a loan, it doesn’t need to be repaid over a set period of time. On the other hand, you may need to repay these funds if you move out of the home within a five-year period. A different amount must be repaid depending on how soon you move. The details of the repayment include:
- $25,000 must be returned if you sell or move in the first year
- $20,000 must be returned if you sell or move in the second year
- $15,000 must be returned if you sell or move in the third year
- $10,000 must be returned if you sell or move in the fourth year
- $5,000 must be returned if you sell or move in the fifth year
What are Some Other Mortgage Programs for First-time Homebuyers?
If you don’t want to wait for the Downpayment Toward Equity Act to pass, there are numerous mortgage programs that are designed specifically to make it easier for first-time buyers to purchase a home. These programs include:
- Federal and state tax deductions
- Government-backed loan, which can be an FHA, USDA, or VA loan
- Good Neighbor Next Door, which is a HUD program that provides law enforcement officers, emergency medical technicians, and firefighters with substantial discounts on certain properties
- HomePath Ready Buyer Program, which is available through Fannie Mae and is designed to make it easier for first-time buyers to purchase foreclosed properties
- State and local assistance programs
As a first-time buyer, purchasing a home doesn’t need to use up your entire savings. Even though down payment requirements can be high depending on the type of loan you apply for, there are many assistance programs you could think about applying for to reduce your costs and simplify the process of owning a home. Though it has yet to pass, The Downpayment Toward Equity Act may be signed into law in the near future, which you should be on the lookout for.