DPA Loan: What It Is, How It Works

What Is a DPA Loan?

A DPA loan, or down-payment assistance loan, is a type of loan designed to help homebuyers cover the down payment and any closing costs on a mortgage. DPA loans are often offered by government agencies, local programs, or nonprofits to assist eligible homebuyers with the upfront costs of buying a home. Learn more about how DPA loans work as well as more about the different types of assistance available.

How a DPA Loan Works

A down payment is the cash you put toward buying a home when you take out a mortgage, and it’s one of the largest costs homebuyers need to plan and save for. Paying more upfront can help you qualify for a home loan and reduce your long-term financing costs, such as the interest rate or private mortgage insurance (PMI) payments.

Lenders typically require a down payment of 20% or more for a loan or for you to avoid PMI. The national median home purchase price was $420,400 as of 2024, which would mean you would need to save around $84,000 for a 20% down payment. That can be a major barrier to homeownership for many buyers.

Homebuyers who don’t have enough saved for a 20% down payment can apply for financial assistance, such as a DPA loan. DPA loans provide access to additional funds that can help pay for a down payment and any closing costs.

A DPA loan is usually a second mortgage offered through state, local government, and nonprofit programs. These loans typically help:

• Low- and moderate-income homebuyers
• First-time homebuyers
• Public service employees and workers, such as teachers and firefighters

How to Find a DPA Loan

DPA loans have rates, terms, and eligibility requirements that can vary by state. Here’s where to find DPA loans and other assistance programs:

• The United States Department of Housing and Urban Development (HUD) for home buying assistance programs by state
• Your state’s Housing Financing Agency (HFA)
• Your city and county websites
• The Chenoa Fund

Types of DPA Loans

Different DPA programs can offer different forms of assistance, from full loan forgiveness to deferring payments.

• DPA second mortgages: A DPA second mortgage is a loan that has its own interest rates and terms. Some state DPA programs subsidize interest on DPA loans, lowering the overall cost of the loan. Even without a subsidy, a DPA loan can still help you more easily meet down payment requirements.
• Deferred DPA loans: Also called “soft second” mortgages, a deferred DPA loan has a deferred payment schedule that typically delays repayment until you sell or refinance the home.
• Forgivable DPA loans: Many deferred DPA loans are forgivable after a specified term. Not only does the deferred payment schedule limit monthly costs, forgivable second mortgages don’t need to be repaid in full if the borrower satisfies the terms of the loan.
• DPA grants: A grant isn’t actually a loan, as it doesn’t have to be repaid, but this type of grant can still be applied to a down payment and closing costs.

Potential Drawbacks of DPA Loans

For borrowers unable to afford a down payment, each type of DPA loan offers something they can greatly benefit from, ranging from zero interest to forgiving payments. That said, DPA loans as a whole also have a few downsides that are worth considering before you apply.

• Additional loan costs: Taking out a DPA loan can help with the upfront costs of getting a mortgage. However, it may cost you more in the long run, as non-deferred DPA loans will add an additional payment on top of your monthly housing costs.
• Limited availability: Not every homebuyer will be able to access these loans. Many DPA programs often have limited funding and become unavailable if funds run out. 
• Stricter eligibility requirements: You’ll need to meet certain eligibility requirements in order to get a DPA loan. Some DPA programs are only open to first-time homebuyers or borrowers in certain professions, such as teaching, military service, or public safety. A DPA program may also have an income and/or sales price limit.
• Limited home loan and lender choices: Assistance is often restricted to specific creditors approved by the DPA program. Homebuyers hoping to get a DPA loan might have limited options for lenders and loan terms.

The Bottom Line

Down-payment assistance (DPA) loans can help homebuyers get a home sooner and with a smaller down payment, and borrowers may even be able to qualify for free or reduced-cost funding via grants and forgivable loans, respectively. Explore DPA options to find programs that you’re eligible for, and then discuss these options with your lender to ensure you understand any potential benefits and drawbacks.