How down payment-assistance programs can help clear the path to homeownership

When Will Hunnicutt was searching for an apartment in Atlanta earlier this year, pricey leases and application rejections left him feeling defeated.

“The three-and-a-half times income-to-rent ratio is kind of hard to fulfill when they’re wanting $3,000 in a lot of places,” the 30-year-old social worker said.

Then Hunnicutt found a $1,050-per-month two-bedroom apartment tied to Roots, a real estate investment trust based in the Atlanta area that works to help renters of the properties in its portfolio build wealth toward homeownership. His $1,000 security deposit is invested in the REIT, and he has earned another $200 in quarterly rebates so far for taking care of his unit and paying rent on time.

“The end goal is to buy a house, so having investment funds, that passive income, would be very helpful,” Hunnicutt said.

Roots is currently only available in Atlanta, but has plans to expand this fall. It’s just one approach to a broader aim: helping consumers get financially ready to buy a home.

As buyers continue to struggle with home affordability, experts say programs that help with down payments may be worth another look.

The dream of owning a home is moving further out of reach for many as homes get more expensive. Aspiring homebuyers need to make $113,520 a year to buy a typical U.S. home, according to national brokerage site Redfin — 35% more than what a typical household earns annually.

One barrier toward homeownership is having enough savings for a down payment. Nearly 40% of Americans who don’t own a home point to a lack of savings for a down payment, according to a 2023 CNBC Your Money Survey conducted by SurveyMonkey. More than 4,300 adults in the U.S. were surveyed in late August for the report.

Down payment-assistance programs come in different forms, and from different sources — including state agencies, cities, nonprofits, financial institutions and mortgage lenders. So you’ll have to hunt around to see what’s available in your area.

Usually, assistance programs focus on first-time homebuyers and buyers who meet certain income qualifications. There are also programs focused on “first-generation homebuyers.”

In many down payment-assistance programs, participants have to take a homebuyer education course. Depending on the program, they may also have to meet other conditions, like getting their mortgage through a specific lender or saving a set amount to contribute toward their home purchase.

The aid can be significant. For example, Alternatives Federal Credit Union in Ithaca, New York, has programs offering $9,000 up to $20,000. The Chicago Housing Authority can assist with up to $20,000.

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These kinds of programs are one way to work toward equality in homebuying, as systemic barriers still block the path to homeownership for many Americans, housing experts say. 

This is especially true for Black Americans, who have largely made up the receiving end of decades of redlining, exclusionary zoning and predatory lending, according to Nikitra Bailey, executive vice president of the National Fair Housing Alliance. 

Programs targeted toward first-generation homebuyers are crucial, she said. While it’s common for family to help with a down payment, would-be buyers whose parents rent are less likely to be able to offer that help.

“We know there are thousands of down payment-assistance programs that cities have adopted,” but their reach in “underserved consumers of color” is limited, Bailey said. “And that’s why ‘first generation’ is very important, because it’s a race-neutral way to target resources to the consumers that the future health of the housing system depends on.”

Part of the reason coming up with a down payment is so daunting is that buyers often think they have to put down 20% of the home purchase price. They’re mistaken, experts say.

A National Association of Realtors survey based on transactions from July 2022 to June 2023 found the typical first-time homebuyer has an 8% down payment. And some loans require even less, as little as 3.5% or even 0% down.

Keep in mind, putting less than 20% down typically means you would have to pay private mortgage insurance, or PMI. PMI can cost anywhere from 0.5% to 1.5% of the loan amount per year, depending on different factors, according to The Mortgage Reports. Typically, you can request for mortgage insurance to be removed after you reach 20% equity.

First-time homebuyers may qualify to make penalty-free withdrawals up to $10,000 from a 401(k) plan or traditional or Roth individual retirement accounts. But financial advisors recommend preserving those funds for retirement when possible.

While Roots may help its renters invest to build wealth, experts typically emphasize saving rather than investing for short-term goals.

Low-risk options including high-yield savings accounts, certificate of deposits or Treasury bills may be ideal for people whose timeline to buy is up to five years.

“Anything that you need dollars for in the next three to five years, those dollars should not be invested in the market,” said Janet Stanzak, a certified financial planner and founder of Minnesota-based Financial Empowerment. “Markets typically cycle in three to five year cycles, and the worst case would be, you find a home you want to move on and your money’s in the market and the market takes a downturn.”