Can You Get Down Payment Assistance With a Conventional Loan?

Here at Stairs, we often get asked this question: Can you get down payment assistance with a conventional loan? 

The short answer? Yes. While it’s true that many buyers who receive down payment assistance (DPA) use non-conventional loans, you shouldn’t write off down payment assistance if you plan on using a conventional loan.

However, you need to understand a bit about conventional vs. non-conventional loans and down payment assistance programs to ensure you make the best decision for your circumstances. This article explains it all.

Disclaimer: This article is for informational purposes only and should not be considered as legal or financial advice. Please consult an attorney, mortgage lender, or CPA for guidance on your specific situation.

Can you get down payment assistance with a conventional loan?

Yes, you can get down payment assistance with a conventional loan. Some down payment programs limit eligibility to buyers with an FHA or other specialty loan. However, there are a number of down payment assistance programs that can be used with conventional loans. 

What is a conventional loan and is conventional better than FHA?

A conventional loan is a mortgage loan not backed by the government. There are benefits to government-back mortgage loans. However, conventional loans are the most common. A conventional loan isn’t always better than an FHA loan, but in certain circumstances it can be more appropriate to use one type over the other. 

Forgivable loans

Forgivable loans essentially turn into a grant once the conditions of the loan have been met. Conditions for forgiveness on a forgivable loan tend to be similar to the conditions for repayment on a deferred payment loan: owning the home for a number of years, a level of home equity, and other events.

Forgivable loans are also a common type of down payment assistance, especially for first-time home buyers.

FHA loans

An FHA loan is insured by the Federal Housing Administration. FHA loans are offered by FHA-approved lenders and are typically available only to buyers purchasing their first home.

FHA loans typically have lower closing costs and lower credit requirements. FHA loans may require mortgage insurance premium (MIP) insurance, and have slightly different inspection and appraisal standards than a conventional loan.

However, there are down payment assistance programs which are only available to those purchasing with an FHA loan. Therefore, an FHA loan might be the better option if you need down payment assistance to make your home purchase happen.

Conventional loans

Conventional loans usually have higher down payment and credit score requirements compared to FHA loans. On the other hand, conventional loans often come with lower interest rates and the private mortgage insurance (PMI) can be avoided with a 20% down payment.

There are also fewer down payment assistance programs available for purchasers buying with a conventional loan.

Can you borrow a down payment with a conventional loan?

You can borrow a down payment with a conventional loan, but this may or may not be your best option. For example, if the interest rate for your down payment loan is higher than the rate for your mortgage, or if taking out a separate down payment loan will cost you more than simply taking out a larger mortgage loan, it probably isn’t the best choice. 

Fortunately, there are down payment assistance loans structured specifically for conventional or unconventional loans. 

Here are the different types of down payment loans:

Second mortgage loans

A second mortgage loan is a separate loan that you take out simultaneously along with your primary or first mortgage. In this case, you would use the money from this second loan to make a down payment on your property.  

You will have to make payments on both loans at the same time, but second mortgage loans often have lower interest rates and more flexible repayment terms. 

Deferred payment loans

Deferred payment loans are one of the most common types of down payment assistance loans. A deferred payment loan doesn’t need to be repaid until certain criteria are met. This criteria may be owning the home for a certain number of years, acquiring a certain amount of equity in the home, selling the home, or some other event.

Additionally, some deferred payment loans do not require the entire loan to be repaid at all, as long as certain criteria are met.

These characteristics make deferred payment loans a good option for down payment assistance, because they offer buyers ample opportunity to improve their financial position or reduce their mortgage payments before any repayment kicks in.

Find a down payment assistance loan that’s right for you

If you’re in the dark about where to find information about all these down payment assistance loans, Stairs Financial can help.

Stairs connects you to qualified lenders who work with all the down payment assistance programs you might qualify for, then lets you compare your options side-by-side, apples to apples.

Learn more.

Other down payment assistance available with conventional loans

Although you can borrow a down payment for a conventional loan, you don’t necessarily have to. There are some DPA programs that don’t require repayment at all, as well as other, special-purpose programs that can help you get into a home sooner. 

Grants

Grants might be the best form of down payment assistance because they simply don’t need to be repaid. The tradeoff is that grant programs tend to have more stringent eligibility requirements and may only give out money to a limited number of buyers until grant funds are exhausted. 

Grants are often sponsored by the government. For example, you may have heard of Biden’s First-Time Home Buyers Grant. This legislation hasn’t yet passed, but if it does, it will be entirely funded and dispensed by the government and offer first-time homebuyers up to $25,000 in down payment assistance.

Special purpose credit programs

Special purpose credit programs are a broad category of down payment assistance intended to help people form traditionally underserved populations purchase homes. Special purpose credit programs are sponsored by lenders, and therefore may or may not require a conventional loan, as that decision depends on the sponsoring lender.

Special purpose credit programs are an emerging form of down payment assistance, and many lenders are just now ironing out the details of their programs. However, we do know that some special credit programs will have down payment assistance attached. 

What is the lowest down payment for a conventional loan?

The lowest down payment for a conventional loan is 3% of the purchase price. The mortgage interest rate on a conventional loan typically gets reduced if you make a 5% down payment, and further reduced if you make a 10% down payment. A 20% down payment nets you the lowest mortgage rate and removes the PMI requirement.

Generally speaking, making a larger down payment is better. However, since the mortgage rate gets reduced at the 5%, 10%, and 20% marks, it’s possible that it might be better to get to the 5% or 10% threshold and then invest any leftover down payment money to cover closing costs or make initial improvements or repairs to the home.

How much down payment you make on a house will depend on your specific financial situation, what you are able to pay each month on the loan, and other such factors. It’s a good idea to get advice from a real estate professional or mortgage lender to determine the best course of action for your particular situation.

What are the acceptable sources of down payment for a conventional loan?

Money you’ve saved up (this includes gains on investments, so long as you follow tax laws), loans, down payment assistance funds, and gifts are the acceptable sources of down payment for a conventional loan. 

Out of all these options, gifted down payments are the only source of down payment funding that comes with special considerations.

You can get into trouble if you pay back a gifted down payment, and there are also certain limits on who can give you money for a down payment. However, the rules for gifted down payments are pretty easy to understand, and you likely won’t have an issue as long as you know what to do and what not to do.

As far as lenders are concerned, all sources of down payment funds are essentially treated the same: they subtract the down payment from the loan amount. 

In some cases, the lender will be involved with the repayment of a down payment loan. Other than that, any saved money, loaned money, down payment assistance funds, and gifts are fair game for making a down payment.

If you’re ready to explore all of the down payment assistance available to you, Stairs Financial is ready to help.

Learn more about how Stairs can help you get into your first home sooner with down payment assistance.