Down payment grants vs assistance loans: which to choose

The four structures

Grants. The FDIC guide says plainly that grant funds do not have to be repaid. For a conventional loan, Fannie Mae requires the award letter or agreement to include language that repayment is not expected and to explain how the funds will be provided. Grants must come from an eligible source, such as a government agency, nonprofit or lender, and not from the seller or another interested party.

Forgivable loans. These are recorded as a second lien but are reduced or cancelled over time if you meet the program's conditions, typically living in the home as your main residence for a set number of years. Sell, rent it out or refinance too soon and some or all of the balance may be due.

Deferred loans. No payments and often no interest, but the whole amount comes due later. The FDIC guide warns that soft-second terms can be difficult to understand, borrowers sometimes forget the loan exists until repayment is due, and some carry restrictions on transfer or sale.

Repayable second loans. These work like any small mortgage: a rate, a term and a monthly payment that counts in your debt-to-income ratio.

What each one costs if plans change

The difference between these structures shows up when you leave early. Picture $10,000 of help and a move in year four:

• A grant costs nothing.
• A forgivable loan that forgives 20% a year over five years would leave $2,000 due, if the program forgives on that schedule.
• A deferred loan would leave the full $10,000 due from your sale proceeds.
• A repayable loan would have cost you four years of payments, and the remaining balance would be paid at sale.

These terms are simplified for illustration. Real programs set their own forgiveness schedules and triggers, which is why you need the actual documents.

Rules that matter more than the amount

The FDIC guide notes that most state housing finance agency assistance must be used with that agency's own first mortgage. That pairing is where hidden cost can sit. Compare the first mortgage's rate and fees with what you could get elsewhere. A large grant attached to a noticeably higher rate can cost more over time than a smaller grant paired with a cheaper loan.

Other common conditions include:

• Income and price limits. The FDIC guide says these are often stricter for the assistance than for the agency's first loan, so qualifying for one does not guarantee the other.
• First-time buyer status, often defined as not owning a home in the past three years.
• Homebuyer education before closing.
• Occupancy. The home must be your main residence.

Fannie Mae also adds a funding rule: down payment assistance may not be funded in any way through the first mortgage, for example through premium pricing that raises your rate.

How assistance fits your loan

Grants do not add a lien, so they do not change your combined loan-to-value. Assistance loans do. For Fannie Mae loans, eligible assistance loans from housing agencies and similar providers are handled under its Community Seconds rules, which allow combined loan-to-value ratios above the usual limits when the second loan comes from an approved type of provider.

On how much of your own money you need: for a one-unit principal residence, Fannie Mae requires no minimum contribution from your own funds when a grant is used, even when the loan-to-value is over 80%. For two- to four-unit homes above 80%, you must put in 5% of your own funds before grant money can be used.

Questions to ask

Before you build a purchase around assistance, get written answers to these:

1. Is this a grant or a loan? If a loan, is it forgivable, deferred or repayable?
2. What exactly triggers repayment, and is the amount reduced over time?
3. Does refinancing count as a trigger, and will the program agree to stay in second position if you refinance?
4. Must I use your first mortgage, and what are its rate and fees?
5. How long does approval take, and are funds limited? The FDIC notes grant programs may run out faster.
6. Is any part of the help taxable? Ask the program and a tax professional.

A HUD-approved housing counseling agency can help you compare programs, and the CFPB suggests starting there to find local options. Your state housing finance agency, listed by NCSHA, publishes its own program terms.

The bottom line

Grants are money you keep; assistance loans are obligations with conditions. Read the terms for what triggers repayment, compare the first mortgage that comes with the help, and choose the structure that fits how long you realistically plan to stay. When in doubt, a housing counselor can lay two offers side by side with you.