Buying your first home isn’t easy, especially if the odds are against you.
The U.S. homeownership rate made its highest-ever annual jump in 2020, according to the National Association of Realtors, with a total of 65.5% of U.S. households owning their homes.
The homeownership rate for non-White Americans was lower, though. While 72.1% of White Americans owned homes, Asian Americans (61.7%) and Hispanic Americans (51.1%) experienced lower levels of homeownership. And the homeownership rate for Black Americans was just 43.4%, even lower than where it was 10 years prior in 2010 (44.2%).
Rising home prices and interest rates are pricing out many first-time homebuyers across the country. But minority buyers may be hit especially hard thanks to factors like lower credit scores, less money in savings, and other financial disparities. These types of economic disadvantages can make it harder for people of color to get approved for a mortgage, let alone win the bid on a home in a competitive market.
Today, loan alternatives and down payment assistance programs are among the resources available to make the home buying process more accessible. Combined with the right lender, assistance, and education, some experts say these programs can help close the homeownership gap.
Home Buying Barriers
The challenges of buying a home are often heightened for some minority Americans already facing financial inequalities.
Credit, for example, is one of the biggest factors keeping minorities from owning a home, says Joy Cluff, a lender and area manager at Guaranteed Rate, an online mortgage lender.
Less-than-perfect credit can prevent potential buyers from securing financing for large assets, such as a home. And data shows that majority-Black and majority-Native American communities have lower credit scores and higher debt-to-income ratios compared to communities where the majority is made up of other racial groups, according to a report from the Urban Institute. The report analyzes credit bureau data from 2020 and 2021.
Secondly, buying a home takes a significant amount of money. The average minority homebuyer doesn’t have enough savings to cover upfront costs on their first home.
The average U.S. home costs $389,500, recent data from the National Association of Realtors (NAR) shows. If you put 3.5% down — the minimum required down payment for an FHA loan, commonly used by first-time homebuyers — you’ll pay around $13,600. Closing costs, which typically run 3% to 6% of the purchase price, add another $11,600 to $23,300, for a total of at least $25,200 needed at closing.
That’s more than what most minority Americans have in savings. Black Americans have an average of $13,270 saved and Hispanic Americans have $11,860, for example, based on the 2019 Federal Reserve Survey of Consumer Finances. That’s significantly lower than the average $51,510 savings of White Americans.
These factors — especially in combination — can lead minority Americans to feel like they’re not financially prepared to get approved for a mortgage, let alone afford a home. But it’s a false narrative that can be changed with the right conversations and motivation, says Todd Simon, lender and regional manager of Legacy Home Loans, a mortgage company with branch locations across the country.
Down Payment Assistance Programs and Alternative Loans
Some assistance is available via programs that can help you more easily qualify for a mortgage.
Down payment assistance programs and government-backed home loans are two common options that can help close the homeownership gap for some. Both can help reduce upfront home costs and ongoing mortgage payments.
Down payment assistance programs
Down payment assistance programs are often available through local government programs. Some banks also offer them.
These programs can offer up to thousands of dollars toward closing costs and even more money for certain actions, such as completing a homebuyer education course. The money may be given as a grant, credit toward closing, or a forgivable loan.
If you’re interested in a specific program, it’s a good idea to inform your lender, who can help you apply and submit documents on your behalf.
Before considering a government-backed loan, see if you qualify for a conventional loan.
They often have lower interest rates and you may only have to pay 3% as a down payment. If you put down less than 20%, you’ll have to pay monthly private mortgage insurance (PMI), but you can drop that once you hit 20%.
If you don’t qualify for a conventional loan, government-backed home loans can be helpful for first-time homebuyers, and often can be combined with down payment assistance programs. If you have a lower credit score, government loans, such as VA, FHA, and rural development loans with more lenient requirements can help secure a mortgage.
Here are more details:
- FHA: FHA loans are issued by traditional lenders but are backed by the Federal Housing Administration (FHA). These home loans have lower credit score requirements and may be easier to qualify for compared to a conventional loan. You can put as little as 3.5% down, but FHA loans will come with mortgage insurance that can’t be canceled without refinancing.
- VA: VA loans are offered by lenders in partnership with the Department of Veteran Affairs (VA), and available to military and service members. A down payment is usually not required, but other upfront costs may still apply.
- RD: The rural development (RD) or USDA loan is only available for areas determined to be rural, which usually doesn’t include major cities. The loan usually doesn’t require a down payment and often has lower closing costs than a conventional loan.
The VA loan program sponsored by the Department of Veterans Affairs has been shown to reduce inequalities in the housing market by offering service members an alternative path to homeownership where they might otherwise be shut out. In 2019, the spread between homeownership rates of Black and White veterans was 19.6 percentage points, according to a study by the mortgage lender Veterans United Home Loans. In the non-military population, that gap was nearly 30 percentage points.
How to Find Home Buying Programs in Your Area
Home buying and down payment assistance programs largely depend on where you live. Always ask your lender about programs available in your city, county, and state that you may qualify for. There may also be stipulations on debt-to-income ratio, household size, and income limits.
Here are a few resources to find out what programs are available in your area:
- The U.S. Department of Housing and Urban Development lists homeownership assistance programs by state.
- Your city and county’s official websites may list specific programs, guidelines, and contact information.
- The Federal Housing Finance Agency or your state’s agency has programs for new homebuyers and homeowners.
- Your local bank, credit union, or mortgage company may be able to direct you to assistance programs and other resources, or may offer grants themselves.
Home Buying Programs Offered By National Banks
Several major national banks are working toward closing the homeownership gap for minorities and underserved communities. The financial institutions below are among those that offer forgivable loans and grants to help cover down payments and closing costs:
- Chase Homebuyer Grant: Offers $5,000 toward your down payment and closing costs. If you qualify for the DreaMaker mortgage, you can also receive $500 after completing the Chase homebuyer education course.
- Wells Fargo’s NeighborhoodLIFT: This program offers a zero-interest down payment loan. The loan doesn’t need to be repaid as long as the borrower meets certain requirements.
- Bank of America’s Community Affordable Loan Solution: Uses on-time payments from rent, utilities, and auto insurance to determine creditworthiness. You must complete a homebuyer course, and eligibility is based on income and home location.
- Bank of America’s Home Grant: Offers a lender credit of up to $7,500 toward non-recurring closing costs, such as mortgage points. The funds don’t require repayment.
- Bank of America’s Down Payment Grant: Offers a grant of up to 3% of the home purchase price (up to $10,000) to be used toward the down payment.
- TD Home Access Mortgage: The program offers a 30-year fixed-rate loan with a down payment as low as 3%. You may also qualify for a $5,000 lender credit toward your down payment. It can be used toward a new home purchase and refinancing.
- HomeReady: Fannie Mae’s homebuying program requires a minimum of 3% down. It’s for first-time homebuyers and existing homeowners wanting to refinance with a 620 credit score or higher.
- Home Possible: The Freddie Mac Home Possible mortgage program lets borrowers put down as little as 3% and be flexible with their funding sources.
What to Know Before Applying for Down Payment Assistance
Down payment assistance programs can be key to homeownership for many, but there are some caveats that potential buyers should keep in mind.
Read the fine print
First and foremost, pay attention to whether the money is repayable or forgivable.
Most down payment assistance programs come with strict requirements that homeowners must adhere to, or risk having their funding clawed back, says Simon.
For example, your down payment assistance program may require you to keep your home for five years to avoid repaying the grant or loan. But unexpected opportunities can appear at any time. Say you want to relocate for a job two years in. In that case, you’ve put yourself in a bind and may need to sell it sooner than planned, says Simon.
Others may require you to pay the loan back if you don’t follow certain restrictions for a given amount of time, such as not refinancing or using the house as an investment property. If you do so within that time frame, you may have to pay the forgivable loan or grant back in full.
Give yourself time
Home buying programs and government-backed loans may require extra work and documentation to verify income, debt, credit, and more. Once the documents are submitted, the state, county, or city may take weeks to process the application and distribute the funds.
For instance, as a mortgage lender, Cluff says it can take 45 to 60 days total to handle underwriting, appraisal, and other lender requirements, and then send the request to the state for down payment assistance.
Some programs require borrowers to attend classes that fill up fast in order to get assistance, Simon adds. Completing the programs in time for closing may not be ideal in a seller’s market when homes are being sold quickly.
Be prepared to put in multiple offers
Over the past few months, houses have sold quickly — some before they even hit the market. In such a competitive environment, sellers often overlook offers with down payment assistance programs or certain types of loans, says Cluff.
When faced with multiple offers, many sellers prefer conventional loans and cash offers — which may be disbursed right away — over government programs that can come with added stipulations, such as repairing a worn roof or replacing appliances, to meet loan guidelines and sell the property.
Save for unexpected upfront costs
There may be fees that chip away at the down payment assistance that still may mean that you bring more money to closing. For example, lenders may also have to add discount points to get approval for the loan.
“That cost is outpacing what you would get from down payment assistance,” says Simon. “Most of it is going to be eaten up by just locking the interest rate in this environment.”
More Ways to Simplify the Homebuying Process
Even facing an uphill battle, buying your first home isn’t impossible. Here are a few options to consider if you’re a first-time homebuyer today:
If you have a poor credit history, start working to build or repair your credit by paying outstanding balances, and making a habit of paying your bills on time and in full.
Different factors can impact your credit score, and lenders may be looking at different details found on your credit report. It can be useful to speak with a lender to understand all of your options and the biggest priorities when it comes to credit.
“If you don’t know exactly what to pay off, then you can put your resources in the wrong place and it doesn’t get you the results you need,” says Simon.
Home buying education
Before starting the homebuying journey, Cluff and Simon encourage potential homebuyers to learn the ins and outs of getting approved for a mortgage and what it takes to close on a home.
Find the right help
Throughout the process, both experts say you should always get your information from a lender or industry professional.
The biggest mistake first-time homebuyers make is asking for advice from people not in the industry, says Cluff. Lenders can help you understand rapidly changing requirements and guidelines, she says, and how they may pertain to your individual situation.
Find a lender that you can trust, Simon adds. Talking to a lender you can relate to, or who understands your financial situation, can motivate you through the process.
“I think it’s really important that minorities like us need to have a representation in the real estate world and mortgage world,” Cluff says. “There’s some kind of comfort and connection where you can open up to a person that’s been down that path.”
Down payment assistance programs aren’t perfect, but they are a beneficial option for many people to secure their first home — especially those most affected by financial and credit disparities. Some government-backed home loans and programs can help cover closing costs and down payments, and help make mortgage payments more affordable.
Plus, these programs can help borrowers keep some cash savings for other expenses, instead of using the money toward upfront home costs, which can help those without robust savings stay financially secure. Just be sure to read the fine print and weigh all options before applying.