Where state down payment money comes from
No federal program mails a down payment check to a buyer. Federal law instead gives states three financing tools, and each state’s housing finance agency (HFA), along with city and county housing departments, turns them into products sold through lenders.
The oldest is the qualified mortgage revenue bond. An HFA sells tax-exempt bonds and lends the proceeds as below-market first mortgages, and many agencies attach a down payment assistance (DPA) second loan to that mortgage 1. The second tool is the Mortgage Credit Certificate (MCC), a federal income tax credit the HFA issues to the borrower 2. The third is HUD’s HOME Investment Partnerships Program, a formula grant to states and local participating jurisdictions that can pay for down payment and closing costs as a grant, a deferred or forgivable loan, or an amortizing loan 3. Many HFAs also fund DPA from agency reserves or state housing trust funds, and that money carries only the rules the state writes.
Because the source of the money sets the rules, the most useful question about any program is which of these pots it draws from.
The federal rules behind “first-time” and the income caps
Bond-financed mortgages carry the rules most buyers run into. At least 95% of a bond issue’s net proceeds must go to borrowers who had no present ownership interest in a principal residence during the three years before the mortgage is signed, with exceptions for homes in federally targeted areas 1. Borrower income is generally limited to 115% of the applicable median family income, and the purchase price to 90% of the average area purchase price, with higher limits in targeted areas and for larger families 1. This is why “first-time buyer” in most state programs means no ownership in the past three years, not never having owned.
HUD uses the same three-year lookback. Its Housing Trust Fund rule defines a first-time homebuyer as a person and spouse who have not owned a home in the three years before the assisted purchase, and it extends the term to displaced homemakers and single parents 5.
HOME-funded help applies different tests. The family must be low-income, which HUD defines as income at or below 80% of area median income adjusted for family size 4. The home must stay the buyer’s principal residence for the whole affordability period, the buyer must complete housing counseling, and the price may not exceed 95% of the area median purchase price 3. HOME itself does not require first-time status, although many states add it.
| HOME assistance per unit | Minimum affordability period |
|---|---|
| Under $25,000 | 5 years |
| $25,000 to $50,000 | 10 years |
| Over $50,000 | 15 years |
The periods are enforced through resale or recapture terms written into the buyer’s documents 3. Older material still cites $15,000 and $40,000 thresholds; the current regulation uses $25,000 and $50,000.
Counseling tied to a HUD program must come from a HUD-certified counselor working for a HUD-approved agency 6. HUD’s agency search, or its line at 800-569-4287, lists approved counselors 9.
What each state decides for itself
Within those federal ceilings, the HFA sets nearly every term a buyer compares:
- Amount. A flat dollar figure, or a percentage of the purchase price or the first-mortgage amount.
- Income and price limits. Usually published by county or metro area and household size and revised every year. Programs with no HOME money often allow incomes well above 80% of area median income.
- First-time requirement. Whether it applies at all, and exceptions for veterans, targeted areas, single parents or displaced homemakers.
- Underwriting. Minimum credit score, debt-to-income cap, minimum cash the buyer must contribute, and which first mortgages (FHA, VA, USDA or conventional) can be paired with the assistance.
- Education. An online course, a session with a HUD-approved agency, or both.
- Delivery. HFA programs are almost always offered only through participating lenders, so the agency’s lender list is the real starting point.
City and county programs, many of them HOME-funded, can often be layered on top of state DPA, but each layer brings its own limits and repayment terms.
Grant, forgivable loan, deferred loan: what the labels mean
Most products advertised as “grants” are recorded as second mortgages. The note you sign at closing, not the program brochure, tells you which one you have.
| Type | Monthly payment | When it is repaid |
|---|---|---|
| True grant | None | Never, if program conditions are met |
| Forgivable second loan | None, usually 0% interest | Forgiven over a set number of years; the balance is due if you sell, refinance or move out early |
| Deferred second loan | None, usually 0% interest | In full at sale, refinance or payoff of the first mortgage |
| Amortizing second loan | Yes | Monthly, like any other loan |
A deferred loan comes out of your equity when you sell. A forgivable loan becomes a gift only if you keep the home as your residence for the full term. HOME money adds the affordability period shown above.
Bond-financed loans and MCCs carry one more federal condition. If you sell within nine years, you may owe a recapture tax limited to 50% of your gain on the sale, and none is due after nine years or when the disposition is caused by death 1. Ask the lender for the recapture disclosure before closing.
Tax credits and loan limits that are not down payment money
An MCC is a credit equal to a percentage of the mortgage interest you pay each year. The rate must be between 10% and 50%, and when it is above 20% the credit is capped at $2,000 a year 2. It reduces your tax bill over the life of the loan but provides nothing at closing, and not every HFA still issues certificates.
Loan limits are often mistaken for program limits. For 2026, FHA’s one-unit limits range from a floor of $541,287 to a ceiling of $1,249,125 depending on the county 7. The 2026 conforming limit for loans sold to Fannie Mae and Freddie Mac is $832,750 in most counties and up to $1,249,125 in high-cost areas, with higher baselines in Alaska, Hawaii, Guam and the U.S. Virgin Islands 8. These cap the size of the first mortgage. The HFA’s own purchase-price limit is usually lower, and it is the figure that decides eligibility.
Mistakes that cost buyers money
- Using a statewide income figure. Limits are usually set by county and household size, and agencies define countable income and household members in their own guidelines.
- Not reading the repayment triggers. Refinancing to a lower rate two years after closing can make a forgivable or deferred second loan due in full.
- Taking the wrong course. A free online class may not satisfy a program that requires a HUD-approved agency.
- Shopping only on the DPA amount. When assistance requires the agency’s own first mortgage, compare that loan’s rate and fees with a standard loan; the total cost of both loans is what matters.
- Paying for access to a grant. USA.gov states plainly that the government does not offer “free money” to individuals 10. HFA programs are reached through the agency’s own website and its participating lenders. Anyone charging a fee to unlock a “government homebuyer grant” is running a scam.
How to use the state guides
The table above lists each state’s main program and its largest published assistance amount. Each state guide names the HFA’s products exactly as the agency does, labels every one as a grant, forgivable loan, deferred loan or tax credit, and gives income and purchase-price limits with their effective dates. It also explains what happens if you sell or refinance early, and links to the agency’s participating-lender search. Before you apply, compare the forgiveness period, the repayment triggers and the first-mortgage rate attached to the assistance, not just the headline dollar figure.
Sources
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- 10USA.gov, Government grants and loansChecked Oct 20, 2026 · Back to text ↑