Down Payment Assistance 101: Grants vs. Second-Liens vs. Gifts
Down payment assistance sounds simple—help with upfront cash, right? But the world of DPA is packed with confusing terms, repayment rules, and eligibility hoops. Let's cut through the noise and give you a clear map of your options.
Quick Summary
- •Down payment assistance comes in three main flavors: grants (often forgivable), second-lien loans (repayable, sometimes deferred), and gift funds from family.
- •Grants can cover your down payment if you meet residency and income rules, but they usually require homebuyer education and have income/price caps.
- •Second-lien assistance adds a second mortgage payment to your monthly budget, though some programs defer payment or forgive after a set period.
- •You can often stack DPA with seller credits, but you'll need to coordinate timing and program rules with your loan officer.
What Counts as DPA
Down payment assistance (DPA) is any money that helps you cover the upfront cash required at closing—specifically your down payment. Closing costs (appraisal, title, loan origination) are separate, though some programs cover those too.
The two most common types of DPA from programs and nonprofits are:
Grants (Forgivable if Rules Are Met)
A grant is money you don't have to pay back—as long as you follow the program's rules. Typically, that means staying in the home as your primary residence for a set period (often 5–10 years). If you sell, refinance, or move before that period ends, you may have to repay a portion or the full amount. This is called "recapture."
Second-Lien Assistance (Repayable)
A second-lien program gives you the down payment funds as a loan that sits behind your main mortgage. You'll make monthly payments on this second lien. Some programs defer payments (you pay nothing for a few years), and some forgive the balance after you've lived there long enough. Others require full repayment over a fixed term (typically 10–15 years).
How You Qualify (Typical Patterns)
DPA programs aren't free-for-alls. Most have similar qualification patterns:
- •Primary residence only — Investment properties and second homes don't qualify.
- •Income and price caps — Limits are usually tied to your area's median income (AMI). You might qualify if you're at 80%, 100%, or 120% of AMI depending on the program.
- •Homebuyer education — Many programs require a HUD-approved homebuyer education course before you can access funds.
- •No "cash back" — The DPA must go toward your down payment and/or closing costs. You can't get money back at closing.
- •Standard property and appraisal rules still apply — The home must meet program standards, pass appraisal, and comply with your main loan's guidelines. (Learn more in our guide on Understanding Mortgage Loans.)
Numbers Example (Concept Only)
Let's say you're buying a $300,000 home. Here's how different DPA options might work in practice. These are examples only—not offers—and we're omitting rates, APRs, and exact monthly payments since those vary by program, lender, and your credit profile.
Grant Scenario
A $15,000 grant covers your minimum 5% down ($15,000). You still bring $10,000–$15,000 for closing costs (appraisal, title, prepaids). If the grant requires a 5-year residency and you sell after 3 years, you might owe back a prorated amount.
Repayable Second-Lien Scenario
A $20,000 second-lien covers most of your 10% down ($30,000). You bring the remaining $10,000 plus closing costs. You'll have two monthly payments: your main mortgage plus the second-lien payment. If the second has a deferred period, you might not pay anything on it for the first 2–3 years, then payments kick in.
Hybrid Scenario
A $10,000 grant plus a $10,000 second-lien covers your 10% down. You bring closing costs. This balances lower cash-to-close (just closing costs) with a smaller second-lien payment than the repayable-only option.
Pros and Cons
Pros
- ✓Opens the door sooner — You can buy without saving a full 20% down payment.
- ✓Preserves savings — You keep your emergency fund and cash reserves for moving, repairs, and unexpected costs. (Budgeting for homeownership? Check out The Hidden Costs of Homeownership.)
- ✓Can stack with seller credits — Where program rules allow, seller credits can help with closing costs while DPA covers the down payment.
Cons
- •Extra paperwork and timelines — DPA approval adds steps and can extend your closing timeline by 1–2 weeks (or more if there are delays).
- •Income and price caps — If you're over the program's income limit or the home price is too high, you're out.
- •Repayable seconds add a payment — That second-lien payment increases your monthly housing costs.
- •Recapture and early-payoff rules — Grants can come with repayment obligations if you move or refinance too soon. Some programs charge interest or fees if you pay off the second lien early.
Common Mistakes to Avoid
Warning: Common Pitfalls
DPA programs often require pre-approval, homebuyer education completion, and program-specific documentation. Start early—ideally when you start house hunting.
Grants can be free, but second-liens add a monthly payment. Even grants have strings (recapture, residency requirements). Read the fine print.
Many programs require a HUD-approved homebuyer education course. Missing deadlines or incomplete paperwork can disqualify you or delay closing.
What To Do Next (Step-by-Step)
- 1Get pre-approved and confirm program fit
Work with a loan officer who understands DPA. They'll help you identify programs you qualify for and ensure your main loan (FHA, VA, Conventional) is compatible with the DPA program. (For tips on navigating the application process, see The Do's and Don'ts of Mortgage Loan Applications.)
- 2Complete the homebuyer education course
Most programs require this upfront. It's usually online and takes 4–8 hours. Get your certificate early.
- 3Compare grant vs. second-lien side-by-side
Look at both your cash-to-close (how much you bring to closing) and your monthly payment impact. A grant might mean you bring more cash upfront but have a lower monthly payment. A second-lien might mean less cash upfront but a higher monthly payment.
- 4Coordinate allowable seller credits with your agent
Some DPA programs limit how much seller credit you can accept. Make sure your agent knows these limits when negotiating.
Ready to Explore Your Options?
Quick FAQ
Do I have to be a first-time buyer?
Many programs target first-time buyers (haven't owned a home in the past 3 years), but some programs are open to repeat buyers too. Check your local program rules.
Can I use DPA with FHA/VA/Conventional?
Yes, DPA can work with FHA, VA, and Conventional loans, but not all programs are compatible with all loan types. Your loan officer will confirm compatibility.
Is there a catch with grants?
Grants typically require you to stay in the home as your primary residence for 5–10 years. If you sell or refinance early, you may owe back a portion or the full amount (recapture). Some grants also have income recapture if your income rises significantly after purchase.
Can I combine DPA with seller credits?
Often yes, but program rules vary. Some programs limit total assistance (DPA + seller credits) to a certain percentage of the purchase price. Your loan officer will coordinate this.
How long does DPA approval take?
Typically 1–2 weeks after you submit all required documents, but delays can happen if documents are incomplete or the program is backlogged. Start early.
Will DPA affect my interest rate?
DPA programs themselves don't directly change your interest rate, but they may affect your loan-to-value ratio (LTV), which can impact pricing. Your loan officer can explain how your specific DPA option interacts with rate pricing.
Can I use DPA on condos or manufactured homes?
Some programs allow condos (if they meet program standards), and some allow manufactured homes. Program rules vary, so confirm eligibility for your property type early.
Ready to Explore Your Options?
Rockhouse Mortgage, LLC | NMLS #2469785
Educational only; not a commitment to lend. Qualification and terms subject to credit, income, collateral, and underwriting approval. Equal Housing Lender.