DPA Grant vs DPA Loan: What's the Difference?

DPA Grants -- Free Money

A down payment assistance grant is exactly what it sounds like: money given to you that you never have to pay back. No repayment. No strings beyond living in the home as your primary residence for a required period. It is funded by the state or a housing authority and is designed to help buyers who otherwise could not afford the down payment.

Grants are typically capped at a percentage of the loan amount or a fixed dollar amount. For example, TSAHC (Texas State Affordable Housing Corporation) offers grants up to 5% of the loan amount. On a $300,000 home, that is up to $15,000 in assistance you never repay.

The main requirement is that you occupy the home as your primary residence for a minimum period (often three years). After that, there are no restrictions. If you sell after the occupancy period, the grant is not recaptured. It is yours to keep.

DPA Loans -- Deferred, Forgivable, and Low-Interest

DPA loans come in three main types. Understanding the difference is important because each one affects your finances differently:

• Deferred-payment second lien: $0 monthly payments. The balance is due only when you sell, refinance, or pay off the first mortgage. No interest accrues in most cases. This is the most borrower-friendly type of DPA loan.
• Forgivable second lien: Similar to a grant but with a clawback. The loan is forgiven (written off) after you live in the home for a set number of years, typically 3 to 5 years. If you sell before the forgiveness period ends, you repay a prorated amount. This is the most common type of second lien in Texas DPA programs.
• Low-interest second mortgage: Small monthly payments at below-market rates, repaid over 10 to 20 years. This type adds a modest monthly payment to your housing costs and is less common than the other two.

Grant vs Forgivable Second Lien

Both give you money upfront. The grant has no repayment obligation whatsoever. The forgivable lien has a clawback if you sell early. Here is how to think about it:

• If you plan to stay 5+ years: The forgivable lien is nearly as good as a grant. By year 5, the full amount is typically forgiven, and you owe nothing.
• If you might move within 2 years: A true grant is safer. With a forgivable lien, you could owe back most or all of the assistance if you sell before the forgiveness period ends.
• Best practice: Always ask your lender whether the assistance is a grant or a forgivable lien before you commit.

How to Know Which You Qualify For

Your lender determines which DPA products you are eligible for based on your income, credit, loan type, and the specific program. Not all programs offer grants. Some only offer second liens, and some offer both.

The most important question you can ask your lender is: "Do you have grant options, or only second liens?" Many buyers assume all assistance is free money, only to discover at closing that they have a second mortgage they did not fully understand.

Your income level also plays a role. Some grant programs have income limits that make them available only to low- or moderate-income buyers. If your income exceeds the limit, a forgivable or deferred second lien may still be available even if the grant is not.

Real Comparison

Let us look at a real scenario to make the difference concrete:

The grant saves you the most money. The forgivable lien is essentially a grant if you stay past the forgiveness period. The low-interest second adds a real monthly payment you need to budget for.