Residential Down Payment Assistance

A down payment gift assistance program helps potential homebuyers by providing a down payment. The seller gives money to a nonprofit organization, which manages a down payment gift assistance program. This “gift” is usually in the form of a discount in the home's purchase price. The organization then gives an amount of money equal to the seller’s gift to the buyer when the loan closes. The gift is treated as a down payment, and can range from 1-7% of the purchase price or can be a flat amount.    

For example, if the seller gives a gift of $2,500 to the organization, the organization will give the buyer about $2,400 towards the down payment. The other $100 is used by the organization to cover administrative fees. The nonprofit must act as a middleman, because lenders do not allow sellers to give down payment money directly to buyers. Under the rules governing FHA loans, borrowers can accept down-payment money from charities.

About these types of programs, the U.S. Department of Housing and Urban Development (HUD) states the following: "HUD does not approve of 'gift' programs administered by charitable organizations and, thus, will not offer a formal approval . . .”   

Mortgage lenders are responsible for assuring that the gift to the homebuyer from the charitable organization meets the instructions described in HUD Handbook 4155.1 REV-4, CHG-1 Paragraph 2-10(C) (e.g., no repayment implied, etc.). Charitable organizations that comply with existing regulations and policy guidelines are permitted to give cash gifts to eligible homebuyers and do not need prior FHA approval to do so.  

If you are considering an assistance grant, ensure you are not caught at the table on closing day without the proper funds, or end up paying more for a property than it is worth:

• Do research on the organization administering the grant.  Avoid companies with questionable financial backgrounds or histories of financial instability.

• Make sure the program provider belongs to the Homeownership Alliance of Nonprofit Downpayment Providers (HAND), comprised of many down payment assistance charities. HAND sets standards of ethics and conduct within the industry to protect homebuyers and lenders. Most HGPA  member organizations also follow the HUD guidelines for assistance programs. 

• Make sure the real estate agent or mortgage broker is not receiving kickbacks for enrolling people in the program.  For example, a real estate agent or broker who insists that you only work with a particular program could be a red flag.  Real estate agents and mortgage brokers must disclose to you if they are receiving money for a referral.

• Make sure that the seller does not raise the cost of the home after they agree to reduce the cost by participating in the program.

• Ask your lender about loans that qualify for any down payment assistance grants, and make sure the grant the lender suggests follows HUD’s guidelines.