Can I Refinance My Down Payment Assistance Mortgage?

Down payment assistance can be a lifesaver for prospective homebuyers trying to come up with the funds to put down on a loan or cover closing costs. However, for homeowners who have received assistance in the past, the rules for refinancing may be a little confusing.

Can you refinance your mortgage if you got down payment assistance and if so, do you have to pay back the money you received?

Can I Refinance If I Got Down Payment Assistance?

The short answer is yes – you can usually refinance if you were given down payment assistance (DPA) assuming you qualify for the new loan. However, depending on the type of assistance you received, you may be required to repay some or all of the funds. You can often include this amount in your new mortgage, but that also depends on the built-up equity you have in your home.

The Type of Down Payment Assistance Matters

Down payment assistance comes in two primary forms: loans and grants.

Loans are by far the most common type of DPA. They act as a second mortgage that, depending on the program’s terms, you may or may not have to make payments on. In some situations, these subordinate loans can even be forgiven after you’ve lived at the property for a specified length of time.

If you received down payment assistance in the form of a loan, there’s a good chance you’ll need to pay off the remaining balance to refinance. If you have enough equity in your home, you should be able to wrap that payoff into your new mortgage.

Conversely, grants are a type of down payment assistance that does not need to be repaid. This is essentially “free money,” not requiring a second mortgage or encumbrance on your title.

In most cases involving grants, especially if you’ve lived in your home for several years, you can refinance your mortgage without any ramifications related to your down payment assistance.

Check the Terms of Your Down Payment Assistance Program

If you are currently repaying your down payment assistance loan, and the balance will most likely need to be paid when you refinance.

These programs typically do not let you keep the secondary DPA loan intact while getting a new first mortgage.

If you’re not sure what kind of DPA you received, the best thing to do is to read through your program’s terms.

Yes, these terms can be a little tricky to interpret. However, there are some keywords that you’ll want to be on the lookout for:

• Second mortgage loan
• Deferred mortgage
• Deferred payments
• Unpaid principal balance
• Due and payable in full

These terms generally indicate down payment assistance that will need to be wrapped into your new loan or otherwise paid off when you refinance.

Can I Wrap My DPA Loan Into My Refinance?

If you received a down payment assistance loan that needs to be paid off when you refinance, you might be able to wrap the balance into your new mortgage. However, the biggest issue – assuming you can otherwise qualify for the loan – will be whether you have enough equity to do so.

Different types of loans require different amounts of equity for homeowners to refinance. This is referred to as a mortgage’s loan-to-value (LTV) ratio, which represents the maximum amount of a home’s value that lenders are willing to lend.

For example, conventional lenders can refinance a mortgage for up to 97% LTV. That ratio means eligible homeowners must have at least 3% equity to qualify. 

A 97% LTV means that if your home is worth $300,000, your primary mortgage and any additional DPA loans must be no more than $291,000. This assumes closing costs are not wrapped into the new loan but you pay them out-of-pocket.

What about other loan programs? Here is the maximum loan-to-value ratio for homeowners refinancing conventionally and with government-backed mortgages through the FHA, VA, or USDA.

Loan Program	Maximum Loan-to-Value
Conventional Refinance	97%
FHA Refinance	97.75%
VA Refinance	100%
USDA Refinance	100%

Note that FHA streamline, VA streamline, and USDA streamline refinances have no LTV limit. However, these loans will not allow you to wrap a secondary mortgage into the new loan balance.

Conventional Refinance

As we’ve mentioned, a conventional refinance allows you to refinance up to 97% of your home’s value. However, not all borrowers will qualify for the 97% refinance. You must have a mortgage owned or securitized by Fannie Mae or Freddie Mac. Otherwise, your max LTV is 95% (need 5% equity).

Check whether your loan is owned by one of these agencies here:

• Fannie Mae
• Freddie Mac

FHA Refinance

The Federal Housing Administration offers borrowers refinance loans for up to 97.75% of their home’s value. In some cases, this additional 0.75% to 2.75% can be the extra amount necessary to wrap in a down payment assistance loan.

Plus, borrowers with average or lower credit are likely to receive more affordable monthly payments refinancing through the FHA as opposed to going conventional.

VA Refinance

Qualifying borrowers can wrap their down payment assistance into a VA refinance for up to the full value of their home. If your primary loan and DPA total less than your property’s current appraised value, you may be able to combine the two loans into a single VA mortgage.

To qualify for a VA refinance, homeowners must generally be either active-duty service members or honorably discharged veterans. Their current mortgage, however, does not need to have been obtained through the Department of Veterans Affairs.

USDA Refinance

While the USDA does allow borrowers to refinance for up to 100% of their property’s value, it is the only agency that does not let you wrap your down payment assistance into your new loan. According to the program’s terms, borrowers “cannot refinance mortgage debt that is not financed or guaranteed by USDA.”

Fortunately, since the USDA lets borrowers finance their home’s entire purchase price (plus the 1% upfront guarantee fee), few USDA buyers receive down payment assistance, except to help cover closing costs.

It’s also worth noting that only existing USDA borrowers are eligible for their refinancing options.

Do I Need a Cash-Out Refinance to Wrap the Second Mortgage?

In the majority of situations, you will not need to do a cash-out refinance to wrap in your down payment assistance. Both conventional and FHA lenders allow you to do a standard rate-and-term refinance and include any second mortgage – like your DPA loan – that was used to purchase your home.

However, you will need to do a cash-out refinance if you’re refinancing through the VA. That’s because VA lenders do not offer a basic rate-and-term option, only the IRRRL streamline, which doesn’t allow you to include your down payment assistance.

All VA borrowers who need to wrap down payment assistance in their new loan – or are refinancing into the program with a different type of mortgage – must apply for a cash-out refi.

Refinance While Keeping Your Down Payment Assistance Intact

Do you need to pay back your down payment assistance when you refinance? It depends on the terms of the DPA program. However, even when you have a second loan that requires repayment upon refinancing, you may still have alternatives.

Sometimes, the program from which you received your DPA may have its own refinance option, allowing you to lower your interest rate and monthly payment while keeping your second mortgage intact.

For example, the Ohio Housing Finance Agency offers borrowers who have participated in its down payment assistance program the ability to refinance without affecting their second mortgage.

Keep in mind that not all DPA programs will offer this option, and those that do will likely charge a higher-than-market rate on their mortgage refinances.

Other programs, such as those offered under the New Mexico Mortgage Finance Authority, may allow you to refinance just your primary mortgage in the event of financial hardship or similar extraordinary circumstances.

Don’t Unecessarily Pay Off Your DPA Loan

Some down payment assistance loans are forgivable, meaning you will not have to repay them once you’ve lived in your home for a certain number of years. However, you’ll likely be on the hook for some or all of the assistance funds if you move or refinance before then.

Often, forgivable loans wipe out a certain percentage of the debt each year until your obligation is fully extinguished. A common example is five-year forgivable loans, which take off 20% of the balance annually. In this situation, if you refinanced after three years of ownership, you’d be responsible for 40% of the borrowed balance.

Similarly, some grants may need to be repaid if you move or sell your home. In most cases, simply refinancing your loan should not trigger this requirement. Still, it doesn’t hurt to read through the conditions of your grant, particularly if you’ve only owned your home for a couple of years.

Considering Home Improvements?

If you don’t have enough equity to include your down payment assistance but have home improvements you’d like to complete, you may qualify for a renovation refinance loan. These mortgages allow you to finance significant work on your property based on its future “as completed” value. 

In some cases, a rehab loan could provide you with the available equity needed to also wrap in your down payment assistance. 

Down Payment Assistance Refinance – Check Your Eligibility

If you’ve received down payment assistance in the form of a loan – whether it’s delayed, forgivable, or you’re actively making payments – there’s a pretty good chance you’ll need to repay it in order to refinance. However, homeowners can often wrap this total into their new refinanced loan so long as they have enough equity.

For a complete picture of how refinancing would affect your down payment assistance, check out today’s refi rates and apply with an experienced mortgage professional who can help you check your DPA terms and explain your individual borrowing needs.