Grown: How to get down payment assistance to buy a house in Arkansas

FILE - In this Sept. 29, 2020 file photo, a sale pending sign is displayed outside a residential home for sale in East Derry, N.H.
FILE - In this Sept. 29, 2020 file photo, a sale pending sign is displayed outside a residential home for sale in East Derry, N.H.

This story is a part of The Article, your guide to Arkansas news and culture, presented by the Democrat-Gazette. Sign up for The Article's twice-weekly newsletter here or to see stories that have appeared in past newsletters, go here .

Experts at the Arkansas Development Finance Authority say one of the biggest barriers to purchasing a home is saving enough for a down payment.

To help remove that barrier, the state offers down payment assistance programs for low-and-moderate income Arkansans. Here’s what you need to know:

What makes someone a good candidate to buy a home?

Tim Wooldridge, director of outreach for ADFA, said there are three key factors when deciding whether to make the leap from renting to purchasing a home. First, an individual will need a good credit score, Wooldrige said. He recommends at least 640.

Second, the individual needs to evaluate their existing debt and how a mortgage would contribute to it.

Wooldridge said an individual’s debt should not exceed 45% of their income.

For example, if a person is making $3,000 a month and a mortgage would combine with existing student, car, credit card or other debts to push them over $1,350 in monthly payments, buying a house would not be advisable.

The last consideration is the affordability of the monthly payment. Wooldridge said in general, the cost of housing should not exceed 30% of monthly income. If the cost of a monthly mortgage for a home would be greater than that, Wooldridge said purchasing a home may not be the right fit.

However, he said it’s not uncommon for a mortgage payment to be less than the monthly cost of renting, especially due to the high prices of multiple-bedroom rental units.

“We have a lot of warm and fuzzy stories … of people that have rented that had no idea that their mortgage payment is less than their rental,” Wooldridge said. “We do that regularly.”

How much is a down payment?

Wooldridge said people should know it is not necessary to make a 20% down payment on a home.

“You don't have to have 20% down payment like your parents did in the ‘80s to buy a house,” Wooldridge said.

He said today, it’s common for people to make much smaller down payments, even just 3-5%.

Wooldridge said the average cost of a down payment plus closing costs in Arkansas is $6,200.

Who qualifies for down payment assistance?

There are two down payment assistance programs through ADFA, Wooldridge said. Both allow only people seeking a 30-year, fixed-rate mortgage whose credit score is at least 640.

Arkansans whose household income is below 80% of the median household income in their area are eligible for the Arkansas Dream Down Payment Initiative program. Go here to see a chart of that income level by county.

The program offers a forgivable loan up to $10,000 to use toward a down payment. If the recipient stays in their house for at least five years, the loan is forgiven, and the homeowner never pays a cent on the $10,000.

The other program, called the Down Payment Assistance program, is available to Arkansans whose income is between 80% of the area median income and $137,000.

Wooldridge said in this program, home buyers seeking a 30-year fixed-rate mortgage are eligible for a second mortgage to cover their down payment and closing costs.

The home buyers have 10 years to pay off this second mortgage. The interest rate will match the interest rate on the home mortgage, a rate far lower than any other personal loan would be, said Derrick Rose, director of public information and marketing for ADFA.

This program is also different from the Arkansas Dream Down Payment Initiative because it is not necessarily based on household income.

If a household’s income is above $137,000 but one spouse’s income is below that threshold, Wooldridge said that person can participate, so long as they still meet the credit and debt guidelines.

In that situation, the home mortgage and down payment mortgage will be put under only the name of the qualifying spouse.

What steps should qualifying individuals take to participate?

Rose said for people who believe they qualify, the next step is to find a lender for a home mortgage.

He recommends using homeloans.arkansas.gov because it connects users with lenders who have experience with the ADFA programs.

Once a buyer finds a lender, Wooldridge said the lender can explain the intricacies of a home mortgage and help the individual get on the path to buying a home.