If you’ve been seriously shopping for a home, then you no doubt have some idea about the house and neighborhood you can afford and the money you want to put toward a down payment to keep your monthly payments manageable.

And it’s likely that during your search you’ve allowed a few compromises to creep into your thinking to make your homeownership dream come true, perhaps persuading yourself that adding 15 minutes to your commute in exchange for a bigger house wouldn’t be the end of the world. 

But before you nail down your home-shopping budget, don’t forget to explore housing assistance delivered in the form of a grant. Unlike a loan, a grant is money that acts as a subsidy to the recipient assuming certain obligations outlined by the Grantor are met by the recipient.  A grant can be used for a down payment, to offset your loan’s closing costs, or even buy that larger house with the extra bathroom you really want.

Sounds great, now show me the money, you say!

The good news is, first time homebuyer grants are out there. The bad news is, they’re not always easy to find.  

Use the following grant information to guide and assist you as you proceed down the homebuying trail. 

Who’s Got the Money?

The federal government, states, cities, private companies, and nonprofits believe that communities are strengthened through lasting and responsible homeownership. As such, they support and sponsor programs, including grants, to make homeownership more affordable.

As for who gets the money, it’s a fairly large tent covering all walks of life – first-time homebuyers, veterans, the elderly, single-moms, farmworkers, first-responders, teachers, people with disabilities, individuals and families who are experiencing homelessness, to name but a few. Indeed, if you’re drawing breath, and you’re not collecting seven figures in income, you may qualify for some kind of housing assistance grant. The point is, even if you don’t think you’ll qualify, you may, so don’t give up hope or become discouraged that help is only for the destitute.

Where Should You Start Looking?

The easiest place to start would be with your local mortgage lender. Ask if they know of any housing grants or down payment assistance programs. They may offer a lender buydown program, for example, where they may pay a portion of your interest for the first year or two of your loan. This results in benefits that are similar to a grant in that it helps you to purchase your home. If they don’t know what you’re talking about, move on until you find someone who does. 

Also, contact the city where you would like to live. Most cities have housing departments that run affordable/fair housing programs, often supported by federal and state funding. These same cities may have designated special assistance for areas of the city they’re seeking to rehabilitate.

For example, many cities receive Community Development Block Grants (CDBG), administered by the Department of Housing and Urban Development (HUD). In turn, cities receiving these grants disperse them through various programs and agencies to address a wide range of unique community development needs, which, of course, includes housing. HUD determines the amount of each CDBG grant by using a formula that weighs a wide range of unique community development needs.

Expand your search, as well, to include housing programs supported by your state. For instance, the California Housing Finance Agency provides a list of CalHFA-approved lenders that first-time buyers can contact to apply for a loan grant. In Texas, a similar agency, known as the Texas Department of Housing and Community Affairs (TDHCA), administers a variety of programs under such titles as the HOMEbuyer Assistance Program, Texas Bootstrap Loan Program, My First Texas Home and Texas Mortgage Credit Certificate Program.

Getting More Specific

--USDA

The USDA’s Rural Housing Repair Loans and Grants program provides loans and grants to very low-income homeowners (below 50 percent of the area median income) to repair, improve, modernize, or to remove health and safety hazards in their rural dwellings. Loans can be repaid over 20 years at a fixed 1 percent interest rate. Grants of up to $7,500 may be arranged for recipients who are 62 years of age or older and can be used only to pay for repairs and improvements to remove health and safety hazards. Loan/grant combinations may be arranged for applicants who can repay part of the cost. https://www.usda.gov/topics/rural/housing-assistance

--Mortgage Credit Certificate

Many states have their own version of the MCC, which basically provides you a dollar for dollar deduction off your federal income taxes, up to $2,000. If you don’t owe any federal taxes, however, the deduction won’t do you any good. By reducing your potential federal income tax liability, you may have more net spendable income to apply toward your monthly mortgage payment. Be sure to consult your tax advisor. 

https://www.ncsha.org/resource/mortgage-credit-certificate-program-qa/

--Good Neighbor Next Door

The Good Neighbor Next Door program, sponsored by the Department of Housing and Development, provides housing aid for law enforcement officers, firefighters, emergency medical technicians and pre-kindergarten through 12th-grade teachers.

Through this program, you can receive a discount of 50 percent on a home’s listed price in regions known as “revitalization areas.” Paying less than full price for a property is another form of a grant. You’re being granted a sizable price reduction that you don’t have to pay back.

Use the program’s website to search for properties available in your state. You must commit to living in the home for at least three years. https://www.hud.gov/program_offices/housing/sfh/reo/goodn/gnndabot

--Veterans Administration Housing Grants for Disabled Veterans

The VA provides grants to U.S. servicemembers and veterans with certain permanent and total service-connected disabilities to help purchase or construct an adapted home, or modify an existing home to accommodate a disability.

Two grant programs exist: The Specially Adapted Housing (SAH) grant and the Special Housing Adaptation (SHA) grant. The maximum amount available to adapt a family member's home for the SAH grant is $35,593 and for the SHA grant is $6,355. https://www.benefits.va.gov/homeloans/adaptedhousing.asp

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The above list is by no means complete; rather, it’s a start. New assistance programs are forming all the time while others have expired or run their course after meeting a short-term need.

At the same time, while conducting your search for assistance, keep your guard up for websites or for-profit companies that promise to help you find any kind of funding you need for “a small fee.” Many of these organizations have names that imply an association or direct relationship with the U.S. government, when there’s no connection whatsoever. So, steer clear!

Again, your best route for seeking and finding grants to further your housing quest is to first work with professionals who have their feet firmly embedded on the ground in the areas where you want to live.  Start with your local lender or your city’s housing department. They should be knowledgeable about the current housing assistance programs for which you may be eligible.

Be persistent. While it’s true there are no free lunches, sometimes there is assistance with no obligation to pay back assuming certain requirements are met for those diligent and determined enough to go looking for it.

Preparing to take the biggest test of your life, you study extra hard and get a good night’s sleep before the big day. Preparing for a job interview, you research the employer and you show up on the big day at least 10 minutes early. By the same token, when preparing to take out a mortgage for what might be the biggest purchase of your life, there are certain things you do, like collecting work and bank statements, and certain things you don’t, which we discuss below:

1. Don’t Lose, Quit or Change Jobs

To a loan Underwriter, a job signals consistency, continuity and predictability. What lenders don’t like are surprises. Once you leave that safe space and cross the line into unemployment, you’re deemed less reliable and stable.

So, if you have any thoughts about changing jobs, even for a better, higher-paying one, you better sit tight and bite the bullet until you’ve moved into your new home.

If you lose your job before you apply for a loan or lose your job during the loan application process, you will have to show your lender that your situation is merely temporary. Whatever you do, don’t try to hide your current job status from your lender. Concealment could be considered loan fraud. Rather, be prepared to provide a letter of explanation for any gaps in employment of 30 days or more.

If you are self-employed, realize upfront that there will be a greater burden on you to show your income stream than there will be on someone working for wages. Moreover, be prepared to document your job income not only by showing tax returns from the last two years, but also bank statements from the past 12 months.

2. Don’t make big credit card purchases

Unless you can keep your balance under 50 percent of your limit, it’s almost never a good idea to put big purchases on your credit card — and when applying for a mortgage loan, you should absolutely never do it.

Lenders closely follow debt-to-income (DTI) formulas, so if a new credit card charge or even a new credit card application upsets that delicate ratio, you will greatly diminish your chance of being approved for a loan.

Winning a loan approval is largely based on your lender’s belief in your ability to repay your loan. Ideally, your lender wants to see that you use credit sparingly and responsibly. To make a large purchase financed by a credit card not only signals a certain recklessness and volatility that lenders abhor, it will throw off your DTI ratios.

Lenders are trained to look for red flags. Untimely, unscheduled and impulsive large purchases, especially when you’re applying for a loan, certainly qualify as such and are likely to ruin your chances of obtaining a loan.

Depending on your total available credit, closing a credit card account with a high credit limit could hurt your credit score, particularly if you have high balances on other cards or loans. If you have zero balances, your credit utilization rate is zero, and won't be impacted by the loss of a balance.

3. (But) Don’t close your current credit card accounts

Closing a credit card, especially one with a high credit limit, can hurt your credit score, particularly if you have high balances on other cards or loans. So, although your intentions may be good – you’re trying to clean up your credit by consolidating the number of credit cards you’re using -- don’t do it. Such a move could make it appear your debt ratio has gone up.

4. Don’t count retirement income as income if you only tap it sporadically

You don’t get to count money stashed away in an IRA because lenders rarely count it. Even if you have a quarter of a million dollars in your retirement account and high FICOs, you can’t tell your lender you’ll randomly tap your account in retirement to help pay your mortgage. If you’re retired, your income from Social Security, pensions, rental income and other validated sources will have to be enough to qualify you for a mortgage.

Again, lenders don’t like “sporadic,” they like steady. For your IRA account to count as income, you would likely have to show verification of regular receipt of drawdown income for two months and verification that the payments will continue for three years.

In other words, even though you could have an excellent credit history and a respectable nest egg tucked away in your IRA or 401(k), you can’t simply tap those accounts, whenever you prefer, to make up for any mortgage shortfall.

If this retirement standard seems unfair, don’t automatically hold your lender accountable. Government agencies, which buy many of the mortgages that lenders make, often insist that lenders look for “regular and continued receipt” of income from retirement funds and to assess whether “the income is expected to continue for at least three years.”

Lenders sometimes are able to expand their guidelines governing retirement accounts. In some cases, agencies that buy loans from lenders, allow lenders to annuitize applicants’ retirement fund assets, converting untapped IRA and 401(k) wealth into “income” that helps them qualify for a mortgage.

5. Don’t move (transfer, withdrawal or deposit) large sums of money

Moving large sums of money, especially when they are inconsistent with your usual financial pattern, will draw extra scrutiny from your lender. Sometimes, such events can’t be helped. If these movements of funds are absolutely necessary, be prepared to explain and document their occurrence.

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Loan applications get denied all the time for all kinds of reasons. Your application could have been incomplete, the appraisal for the home you want to purchase might have come in too low, there could be a mistake on your credit report.

Whatever the reason, your lender will have tell you why your mortgage was denied. Under the Fair Credit Reporting Act (FCRA), if your loan is declined, lenders are required to provide clear reasons for rejecting your loan application.

That said, don’t make a rejection easy for them. Don’t make any sudden or rash decisions regarding your job or credit, be prepared to explain any unusual or inconsistent movement of funds, and don’t expect to make any intermittent drawdowns of your retirement funds.

When applying for a home loan or refinance, remember to value consistency above all else.

Your goal is to show your potential lender that your past behavior truly is a predictor of future performance.

Despite the importance of interest rates and their direct influence on your monthly mortgage payment, rates should not necessarily be the deciding factor as to whether to buy now, later or at all. There are bigger questions to ask:

Predicting the Direction of Interest Rates

Despite all the known factors that influence rates, such as the state of the economy, inflation, the job market, the housing market, Fed policy, what the 10-year Treasury is doing, etc., no one knows what interest rates will do tomorrow. What is known is that rates will likely rise or fall, so a better exercise is to prepare homebuying strategies for these various interest rate environments.

Rising Rate Psychology

If you know that a purchase – say, a house – will cost you more tomorrow than it will today, you will likely be more motivated to buy that house today.

Yes, you could wait for rates to fall. Perhaps, you know someone who bought when rates were lower, making you think you should delay your buying decision. Buy low, sell high, right? But that strategy could be risky. Let’s use stocks as an example.  Say, you decide to buy ABC coffee at $50, even knowing some of your friends got in at $25. If the stock rises to $100, they certainly have greater gains than you, but you still did okay, too. If you sit out, hoping for falling rates and the reverse occurs, the opportunity could be more expensive.

Falling Rate Psychology

You can buy now, but fear rates are going to fall. In other words, that same house you want to buy today, even if the price doesn’t change, will cost less to finance (smaller mortgage payments) if you just delay buying a little longer. In this scenario, you still face risks. The most obvious is, rates could rise. Second, the home’s price could rise, potentially canceling any discount you would have achieved had rates fallen. And, if you decide to buy now and your fears come true – rates drop – it’s not the end of the world. You may be able to refinance to the lower rate.

Unchanging Rate Psychology

Sometimes, rates that move little or stay in a narrow range can seduce potential buyers into thinking they have ample time before they have to make a decision. What these people sometimes fail to realize is that their own circumstances could change. If two people work, for instance, it may be easier to qualify for a mortgage, than if only one is working, perhaps because the other is staying home to raise a child or start a business. The point is, circumstances change. If you have the means to qualify, this situation may be more important than which way mortgage rates are heading.

The Bottom Line

Rising rates or falling rates should not be the sole basis of whether to buy a home or not. They will play an important role in your homebuying decision, but there are many more factors to consider that you may regard as more important – and they’re not all financial.   

Freedom. You’re the landlord, not somebody else. You’re free to decorate and upgrade any way you like.

Predictability. Unlike rent, your fixed-rate mortgage payments don’t rise over the years.

Equity. Money paid for rent is money that you’ll never see again, but mortgage payments provide the opportunity to build equity in your home.

Appreciation. Like stocks or bonds, homes are assets. And like stocks and bonds, home prices can go up or down in the short term, but, historically, homes have shown steady appreciation.

Tax benefits. The U.S. Tax code lets you deduct the interest you pay on your mortgage, your property taxes and some of the costs involved in buying a home. Consult with your tax/legal advisor.

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While interest rates play a major role in financing a home, they should hardly be the only factor influencing your decision to buy. Instead of trying to time which way rates are headed, perhaps you should ask, how much time am I willing to sacrifice not being a home owner and missing out on the advantages it affords.

The biggest hurdle aspiring homebuyers face is saving enough for a down payment. It takes time and money, but at what point have you saved enough? 

The 20 Percent Rule … Was Made to be Broken

The rule of thumb for down payments has traditionally been 20 percent of a home’s purchase price. It’s a lender thing. Essentially, the larger the down payment, the easier it is for a lender to say “yes.”

The reason is simple: The more money you have at risk in the home, the less of a risk you are to the mortgage holder. In other words, you have more skin in the game. At 20 percent, you have a lot to lose. On a $250,000 home, for example, that would amount to $50,000.

Get in With Less Down

Twenty percent down is not viable amount for many first-time homebuyers. This is particularly true for those who live in markets with high home prices and high rents (which makes saving much more difficult). For instance, as of June 2018, the median home price in California was $600,000. Twenty percent of this is $120,000. With a median income of $64,000 in the state, how is a first-time homebuyer supposed to save almost twice their annual income?

Today there are options available for buyers making a smaller down payment and, because of historically low interest rates and rising housing prices, getting into a home sooner rather than later is often the more prudent move. There are a number of federal, state, and local programs aimed at first-time homebuyers that allow mortgages with as little as 3 percent down—or even nothing down for many VA loan options.

In most cases, you will be required to pay private mortgage interest (PMI), which protects your lender, who is taking on a greater debt burden. However, you will begin accruing equity immediately. Once you reach that 20% loan-to-value threshold, you can have PMI removed or refinance to have it removed, depending on your loan program’s guidelines.

The insurance premium varies but typically runs between 0.5 percent and 1.0 percent of the loan balance, depending on the strength of your credit score, and some of the low down payment programs waive PMI under certain circumstances.

Rising Rents, Rising Costs

If you are trying to save for a down payment while rents are rising at historic rates, it can feel like swimming upstream. And if you’re not saving at a rate that mirrors the housing price increases, you could be going backward. For instance, if the home you’re saving for is $350,000 today but was $320,000 a year ago, your 4% down payment has increased $1,200. So you need to save more now to put the same percentage down. 

Knowing what works best for you and your situation is the key factor in deciding how much money to put down. Your Loan Officer can talk you through the different options available and crunch the numbers to help you make the most of your savings and get you moving toward your homeownership goals.