This article is an introduction to Housing Grants and how to find what’s available in your area. It includes an overview of housing grants, how they work, various types of housing grants, and who qualifies.

What are Housing Grants

Housing Grants are a broad classification for resources used to make home ownership more accessible including cash advances, little or no interest loans, and tax breaks to buyers. Other grants can be in the form of tax credits or direct payments to your mortgage provider to purchase points that reduce interest on a loan. These grants are primarily funded by government agencies, nonprofits, and private business interests. However, there are plenty of housing grants offered by for profit organizations as well. Banks will often give $3000 or more to offset closing costs, several programs eliminate the need for any downpayment at all, or borrowers may end up saving thousands over time with a lower interest loan. All of these are forms of Housing Grants to assist first time home buyers.

For example, the Down payment Toward Equity Act of 2021 is from the US Government and proposes a grant disbursed as a cash advance. The proposal will be available for first-time home buyers. It’s neither a loan nor a tax credit. It’s a cash payment of up to $25,000 applied at closing. It is not cash to walk out with, it must be used towards a down payment, closing costs, or interest rate reduction via discounted points. Another example, the First-Time Homebuyer Act offer a tax credit equal to 10% of the purchase price of a home up to $15,000. For example, if you qualify for a $5000 tax credit, that means your tax bill will be $5000 lower. If that amount is higher than your tax bill, the remaining ta credit can be added to boost your tax refund.

The amount of money you can receive towards purchasing a home varies based on the home, where you live, what you earn, and how early you apply for the grant. Some housing grants target professionals, such as teachers, nurses, and EMTs. Others are available to any person buying in a certain neighborhood or street.

Non-federal programs may require buyers to use specific mortgage loan types such as FHA loans; and, may require additional paperwork not associated with the mortgage application.

Who qualifies for housing grants?

There are more than 3,000 housing grants available nationwide and the many of them target first-time home buyers. Federal grants such as The $25,000 Downpayment Toward Equity Act target low- and middle-income first-time buyers and often add one or two additional eligibility criteria. For example, some programs are limited to teachers and nurses and EMTs. Other programs are for first-generation buyers only.

On the state and local levels, housing grants tend to be geography-based and available to home buyers only in specific cities, communities, or neighborhoods.

Grants will never replace primary mortgages. They can only supplement a mortgage to make homeownership more affordable. Therefore, to qualify for housing grants, applicants must also qualify for a mortgage.

Types of housing grants

Cash advances are the most flexible type of housing grant. The typical housing grant in the form of cash advance to first-time home buyers is around $10,000. When down payment assistance is paid as a cash grant, there’s no requirement to pay it back. However, because grant programs are designed to build community and foster economic growth, it’s common for them to contain a 5-year clause that states that the buyer must live in the home for five years or the grant must be repaid in part or in full.

The Downpayment Toward Equity Act may offer first-time buyers up to $25,000 in cash that can be used for down payment, closing costs, and other home purchases.

Closing cost credits offer a one-time cash grant towards expenses associated with obtaining a mortgage. Grants for closing costs can be applied to mortgage closing costs, real estate taxes, title fees, and more. Closing cost grants aren’t required to be paid back, although some programs may require grantees to occupy the home for 36 months or more.

Interest rate reduction grants can be applied at the time of closing to pay for mortgage discount points to lower the interest rate on the loan. Mortgage discount points are a one-time, up-front fee paid to your lender at closing in exchange for a lower interest rate. For example, purchasing one discount point can lower your rate by 0.25 percentage points. A buyer who is offered an 8% interest rate might buy two discount points and reduce the interest rate by .5% making the effective interest rate 7.5%.

Property tax grants are paid in the form of credits or tax reductions. They award tax abatements and tax relief to home buyers in specially-designated zones of a city. Buyers receive favorable, long-term tax treatment which lowers their tax bill and saves money. Some states and counties issue mortgage credit certificates for up to $2,000 which offset local property tax bills dollar-for-dollar.

Repayable Grants are interest-free loans that have to be repaid when the buyer sells or refinances their home.

How to Find Housing Grants to Buy Your Home

Nearly all grants have some application and verification process. The U.S. Department of Housing and Urban Development (HUD) maintains a semi-complete list of programs, listed by state, county, and city. The lists from HUD are not comprehensive and rather limited since they only include government sponsored grants. There are some housing grants meant to be applied automatically, for example some cities apply a first time home buyer discount for every registered sale with a new buyer box checked off. Very few cities give out money as a default, most often applicants have to apply and meet the grant  administrators requirements.  Housing grant programs are also not widely promoted. With thousands of dollars at stake for someone shopping for a home, it is better to know what’s available prior to starting the mortgage process. For example, some housing grants require buyers to finance with an FHA mortgage. Others may have an occupancy requirement of five years or more. Ultimately, qualifying for housing grants can potentially add a few weeks to your expected closing window if not managed with care.

How Much Money Do You Need For a Down Payment?

Financial institutions want 20% of the home purchase price to be paid in advance. However, with the existence of housing grants it is possible to purchase a home with no money due up front at all. With the help of housing grants, the average out of cash due to purchase a home for a first time buyer was less than 8%.

81% of home buyers use mortgages backed by Fannie Mae and Freddie Mac, which require a minimum 3% down payment; and the majority of the rest use FHA loans which require just 3.5% down. Veterans and active military have access to mortgages with nothing down through the Department of Veterans Affairs, and eligible buyers in rural and suburban areas can use no-money-down loans via the USDA.

Compare cost to buy with and without housing grant

Housing grants are available in all 50 states and many U.S. neighborhoods. Federal programs that apply automatically, such as tax credits, should be accepted when they’re available. By contrast, state and local programs should be scrutinized. State and local grants often require formal mortgage applications and place constraints on home buyer financing. It is possible that a state grant may require buyers to accept a mortgage from a lender with a higher interest rate to begin with. Before using a housing grant, perform a side-by-side comparison of buying the home with the grant and buying a home without it.