This story was updated on July 19, 2021 with the latest developments
A new, massive down payment assistance program could soon become law
First-time, first-generation homebuyers could soon have access to a huge advantage: up to $25,000 to use toward their home purchase.
The Downpayment Toward Equity Act of 2021 seeks to assist homebuyers — especially disadvantaged ones — to start building wealth through homeownership.
The best part: it’s not a tax credit; it’s money that would be available at the closing table.
If passed, this bill could usher in a new era for renters who have struggled to make that first step into homeownership.
What is the Downpayment Toward Equity Act of 2021?
The Downpayment Toward Equity Act of 2021 is a grant that seeks to help first-time homebuyers with up to $25,000 in assistance, available at the time of the home purchase.
The act has not been passed yet; it’s a bill first discussed by lawmakers on April 14, 2021 and formally introduced in Congress with some changes and additions on July 15, 2021.
The bill aims to encourage homeownership, especially among those with average-to-lower incomes or are within a disadvantaged group.
The bill seeks to offer:
- $20,000 for first-time, first-generation homebuyers
- An additional $5,000 for “socially and economically disadvantaged individuals”
Unlike many similar programs in the past, this bill would issue funds to buyers as they are buying the home, not in the form of a tax credit to be realized up to a year later when taxes are filed.
Plus, it’s a grant and does not have to be repaid if the buyer remains in the home at least five years.
The proposed legislation is spearheaded by House Financial Services Committee Chairwoman Rep. Maxine Waters and is part of President Joe Biden’s $2 trillion “American Rescue Plan” infrastructure package.
|Keep in mind that this legislation is in very early stages. It would have to pass the House of Representatives, Senate, and be signed into law by President Biden. Often, many elements are removed from proposed legislation through this process. Still, it’s a hopeful sign for prospective homebuyers who can’t save enough for a down payment.|
How would the bill help homebuyers?
The bill could open up an array of possibilities to economically disadvantaged, first-time, and first-generation homebuyers.
Many renters today want to buy a home. But they have been locked out by skyrocketing home prices. Additionally, factors like student loans and pandemic-related income loss have kept them from saving for a down payment.
This bill would eradicate that barrier for good.
The $25,000 can be used toward down payment, closing costs, and for buying down the mortgage rate.
In short, the funds could cover the entire upfront cost of buying a home in most markets when combined with a low-down-payment loan program like an FHA loan. Here’s an example:
|3.5% down payment via FHA:||$12,250|
|Estimated closing costs of 2% of the loan:||$7,000|
|Buydown of the mortgage rate:||$3,500|
In this scenario, the homebuyer could cover their whole cash outlay and walk into the home for $0 out of pocket assuming they met criteria for the entire grant. So, who qualifies for this assistance?
Who would be eligible for this first-time homebuyer grant?
The bill is being discussed by lawmakers in Washington, D.C. and may change substantially if passed.
But as the draft reads, eligible individuals meet all of the following criteria.
First-time homebuyers: All individuals in the household have had no ownership in a home in at least 3 years
Average or lower income: Your income is at or below 120% of the area median income, based on current place of residence or where the home will be purchased. For high-cost areas, the buyer can earn up to 180% of the area median income. For example, someone buying or living in Austin, Texas could make up to $118,690 per year, 120% of that area’s median income of $98,900.
First-generation homebuyers: Homebuyers whose parents or guardians have never owned a home in any U.S. state, district, or territory. Homebuyers who were ever in foster care would be eligible.
Buying an eligible home: The buyer must purchase a 1-4 unit residential property and plan to live in the home as their primary residence.
Additional $5,000 in assistance
You do not have to be a “socially disadvantaged individual” as defined by the bill to qualify for $20,000 in assistance. However, an additional $5,000 is available for those who identify as Black, Hispanic, Asian American, Native American, or any combination thereof. Those who do not identify as one of these groups can attest that they are otherwise socially disadvantaged by providing “a preponderance of evidence,” says the act’s draft. There will be likely more clarification about how to qualify for this extra assistance as this bill develops in Congress.
Those receiving assistance must participate in home purchase counseling provided by a HUD-approved provider.
Combining the first-time homebuyer down payment assistance with other programs
The Act’s summary notes that this program can be combined with many popular loan programs and even other down payment assistance (DPA) programs.
For instance, you can use the grant with:
- A conventional Fannie Mae or Freddie Mac loan (minimum 3% down payment)
- An FHA loan (3.5% down payment)
- A USDA loan (0% down payment)
- Other loans that meet the definition of a “qualified mortgage” or “QM loan”
A qualified mortgage simply means the borrower meets certain standard requirements, such as having a debt-to-income ratio of 43% or less, and that the loan term is 30 years or less and does not include high-risk features such as interest-only payments.
While the Act does not specifically allow for VA loans, the last point might do just that: VA loans are considered qualified mortgages by the Consumer Financial Protection Bureau (CFPB). While VA loans don’t require a down payment, funds could be used toward closing costs and to make an optional down payment.
The Downpayment Toward Equity Act funds could also be combined with other loan types offered by banks or state-run programs as long as they meet the “qualified mortgage” definition.
Combining with other grants and down payment assistance
The Act’s summary states that you can combine these funds with other grants and down payment assistance programs.
For instance, say you qualified for a $10,000 grant from your city or county housing authority. You can combine that grant with this one for a total of up to $35,000 toward your home purchase.
The bill does not specify a limit to the amount of funds you can receive by combining programs. Assistance levels could reach very high dollar amounts in cities and states offering existing programs.
Repayment of this first-time homebuyer assistance grant
As the draft reads now, this will be a completely free grant and will not have to be repaid, for homeowners who stay in the home at least five years.
For those exiting sooner than that, a diminishing repayment schedule is as follows:
|Exit Year||Repayment Amount|
|Exit in year 1||Full repayment|
|Exit in year 2||80% repayment|
|Exit in year 3||60% repayment|
|Exit in year 4||40% repayment|
|Exit before the end of year 5||20% repayment|
|Exit after 5 years||No repayment|
For grant users who sold within five years, no repayment would be necessary if they profit less than the repayment amount.
For instance, you purchased a home for $350,000 and used $20,000 in assistance. You have to sell in year three. You would owe $12,000 (60% of $20,000). However, you only realize a $10,000 gain. As the draft reads, the penalty would be waived since the realized gain was less than the required repayment amount. However, rules are likely to change as this Act develops.
Under some circumstances, there is no repayment of the grant when moving out before 60 months is up.
An unforeseen death, military deployment, or other hardship can exempt you from repayment. The bill does not define all eligible hardships besides the two mentioned, so it would be wise not to depend on any circumstance as a way to avoid repaying the grant.
In any case, it’s important to make sure you plan to live in the home for at least five years to avoid repayment of the grant.
First-time homebuyer credit FAQ
President Joe Biden proposed a $15,000 first-time homebuyer tax credit in his campaign. That campaign promise has transformed into an actual bill introduced to Congress in April 2021. Here are details on that potential program.
The proposal calls for federal funds to be distributed to state housing agencies, also known as Housing Finance Agencies (HFAs). Presumably, individuals would apply through lenders’ state HFA program and be considered for approval. The homebuyer would also tell their lender about any other assistance they receive so that the loan could be approved accordingly. The states would then issue funds via the lender at closing when the transaction is nearly complete. However, much is yet undecided, so the process could change if the Act passes.
The Act’s draft allocates $100 billion toward the program, 75% of which must be used for the grant funds. The other 25% may be used indirectly, such as for housing counseling or program training. That means $75 billion or more may be available. Assuming buyers get the full $25,000, that’s 3 million buyers who could benefit. In 2020, there were 2.38 million first-time homebuyers, says mortgage insurance provider Genworth. But not all these were first-generation homebuyers. Presumably, the funds could last for years after the legislation passes, if it does.
It’s still unclear if and when this legislation will pass. As of mid-July 2021, the bill has been officially introduced to Congress. Often, bills change dramatically in the process of passing through the House and Senate. Visit this page often for updates.
What if I want to buy before the rush?
If you don’t need this assistance, or might not qualify, it’s a smart move to buy a home now.
A bill passing of such magnitude is sure to drive up demand and make available homes to buy even more scarce.
Want to get ahead of the rush? Apply for a standard low-down-payment loan that is available now and can keep your upfront costs low.