5 Types of First Time Home Buyer Closing Cost Assistance You Should Know About

If you’re thinking about buying your first home, then you probably have a lot of questions. One of the topics that is often overlooked when people research buying a home is the issue of closing cost assistance.

Closing costs are all the costs associated with buying a home apart from the mortgage itself. They include fees, insurance premiums and other expenses, and on average, they cost between 2% and 3% of the purchase price of the home. Even if you’re not planning to buy an expensive home, that’s still a lot of money to save – especially if you’re already on a tight budget to save for a down payment.

At Addition Financial, we work with our members who are first-time homebuyers to help them find the assistance they need to pay for their closing costs. Here are five types of first time home buyer assistance you should know about.

#1: DPA Second Mortgages

Down payment assistance (DPA) mortgages are second mortgages that are used specifically to help with the down payment and closing costs associated with buying a new home. It might seem odd to get a second mortgage at the same time you get your first mortgage, but there are significant benefits associated with doing so.

Some DPA second mortgages are offered at the same rate as the first mortgage, but there are programs that offer deeply discounted interest rates for first-time homebuyers. A traditional DPA second mortgage is amortized over 10 years and will come due sooner if you sell your home or refinance it.

The biggest potential downside of a DPA amortizing mortgage is that you must pay it back, which means it will add to your overall monthly payments for the term of the loan. That may be a problem for some first-time homebuyers, but for others, it’s a way of spreading the expense of the down payment and closing costs over 10 years instead of paying all at once.

An example of a traditional DPA mortgage is the Florida Homeownership Loan Program Second Mortgage, which offers a 15-year mortgage for up to $10,000. You can read more about it on the Florida Housing Finance Corporation’s website.

#2: DPA “Soft” Second Mortgages

Not all DPA second mortgages need to be repaid. A “soft” second mortgage is a mortgage that’s offered at a 0% interest rate and with no required monthly payments. Typically, the mortgage will only come due if you sell, refinance or move out of your home within a specified period. The time period may range from as little as five years to as long as 30 years, depending upon the program you choose.

The biggest benefit of a soft second mortgage is that you will not be required to repay it unless you fail to meet one of the requirements of home occupancy. These vary from program to program, but most require you to use the home purchased as your primary residence and to live in it for five years or more.

An example of a soft second mortgage program for Florida residents is the FL Assist program. It provides a second mortgage of up to $7,500 to cover your down payment and closing costs. The mortgage is a 0% APR loan that is deferred for 30 years. If you sell your home before the term expires, you will be required to pay back the amount of the loan. However, if you keep your home for the entire period, the loan will be forgiven and you will not need to pay it back.

Other programs in this category include:

  • The Fannie Mae HomePath Ready Buyer program, which requires participants to complete a financial education course in return for up to 3% of the home’s purchase price to use toward closing costs. Buyers must purchase a HomePath eligible home to qualify for this program.
  • Salute Our Soldiers Plus, a Florida assistance program that offers 3% to 5% of the home’s purchase price to active military members and veterans. The loan is a 5-year amortizing mortgage that is forgiven at 20% per year, and repayment is waived if the homeowner must relocate as a result of their military service.

If you can qualify, soft DPA mortgages offer the possibility of closing cost assistance with deferred payments to help you buy your first home.

Take our first-time homeowner readiness quiz!

#3: Down Payment Assistance Grants

Not every form of down payment and closing cost assistance is a loan. Some first-time homebuyers may be eligible for assistance in the form of a grant. Unlike a loan, a grant does not need to be repaid.

If you can qualify for a first-time homebuyer assistance grant, then you will receive money to use toward the down payment and closing costs associated with buying your first home. The biggest benefit of getting grant money is that unlike a loan, a grant does not need to be repaid at any time.

The downside of relying on grant money for your first home is that grant programs typically have more stringent requirements than loan programs. They may also have limited funds. If you do not meet the grant’s requirements then you won’t be able to get grant money.

The typical requirements for grant recipients include:

  • Being a first-time homebuyer
  • Staying within the specified income limits
  • Taking an approved homebuyer’s education course
  • Staying within the specified purchase price limits
  • Buying a property within the specified geographical area
  • Using the home you buy as your primary residence

First-time homebuyers in Florida are fortunate because there are many grant programs available to help with closing costs. Here are a few to consider:

  • The State Housing Initiatives Program (SHIP) is a statewide program that offers money to every Florida county and many cities to provide down payment and closing cost assistance to home buyers.
  • The Purchase Assistance Program in Seminole County provides grants up to $50,000 to cover the costs of a down payment and closing costs.
  • The Affordable Home Ownership Assistance Program offers home buyers in the Daytona Beach area up to $50,000 in assistance. In addition to the usual requirements, this program requires homeowners to put up to $500 toward the purchase of a home to qualify.
  • HFA Preferred Grants provide 3% to 4% of your home’s purchase price The money may be used for either a down payment or to cover your closing costs.

If you think you may qualify for a grant, it’s a good idea to research grants in your state, county and city to see what’s available.

#4: Include Closing Costs in Your Primary Mortgage

An option that a lot of first-time homebuyers don’t consider is asking the home’s sellers to cover the closing costs. Part of the reason may be that there’s some confusion about what that means. You’re not asking the seller to pay the closing costs out of pocket. Instead, you are simply wrapping the closing costs into the purchase price of the home.

For example, if you initially offered $300,000 as the purchase price of a home and the closing costs would be $2%, or $6,000, you would simply up your offer to $306,000 and put the $6,000 toward the closing costs.

Even if the home’s sellers decline to pay the costs, you can still ask your mortgage lender to wrap the costs into your mortgage – provided you can qualify. This is one of the easiest ways to buy a home without needing to save enough for the closing costs. The increase to your monthly payment will be relatively small – and this option may allow you to fast-track your purchase of your first home.

#5: Down Payment Savings Matching Programs

Saving for a down payment on your first home can take a long time, even if you budget carefully. One option offered by some lenders is the down payment savings matching program.

These programs are typically offered by government agencies or non-profit organizations in association with lenders. They allow first-time homebuyers an opportunity to save enough money for a down payment quickly by matching their savings. Most programs offer dollar-for-dollar matching, although there are some variations depending on the program you choose.

Some matched savings programs allow homebuyers to use them in conjunction with a down payment assistance program, which enables them to streamline the process of saving and achieve their dream of homeownership quickly.

It’s important to note here that some matching programs require homebuyers to work with specific lenders. You should check the requirements if you decide to use a down payment savings matching program to help you save for a down payment.

Buying your first home is exciting, but it doesn’t have to be scary. There are first-time homebuyer assistance programs to help you manage your down payment and closing costs without taking years to save the money you need.

Are you ready to buy your first home in Florida? Click here to read about Addition Financial’s first time home buyer programs and mortgages!

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