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HOMEstead Downpayment and Closing Cost Assistance: A Path to Homeownership

The Pennsylvania Housing Finance Agency (PHFA) offers the HOMEstead Program—a powerful financial assistance program designed to help first-time homebuyers achieve their dreams of homeownership. Through HOMEstead, eligible borrowers can receive subordinate mortgage financing of up to $10,000 to cover downpayment and closing costs when purchasing a home in Pennsylvania.

Program Overview

The HOMEstead Program provides non-interest-bearing, forgivable loans to qualified first-time homebuyers. The funds come from the HOME Investment Partnership Program (HOME) and the American Dream Downpayment Initiative (ADDI), both administered by the U.S. Department of Housing and Urban Development (HUD). These funds are paired with a first mortgage funded by PHFA to create an affordable homeownership solution.

The program's standout feature is its forgiveness structure. HOMEstead loans are forgiven on an annual basis over five years at a rate of 20 percent per year. This means borrowers have no monthly payment on the assistance loan—a significant advantage when managing multiple mortgage obligations.

How Much Assistance Can You Receive?

HOMEstead assistance is based on the borrower's actual need. The loan amount must be between $1,000 and $10,000. When determining the assistance amount, lenders use a comprehensive needs assessment that considers:

  • The borrower's required minimum down payment contribution
  • Closing costs and settlement expenses
  • The borrower's available liquid assets
  • The desire to lower front-end housing ratios to 30 percent, if possible

A critical component of the program is the requirement that borrowers retain at least $5,000 in liquid assets after closing. This cushion protects both the borrower and the lender by ensuring the homeowner has emergency reserves available.

Key Program Requirements

Borrower Eligibility

To qualify for HOMEstead assistance, you must meet specific criteria:

First-Time Homebuyer Status: You cannot have had an ownership interest in a principal residence during the three years before closing. However, exceptions exist for borrowers purchasing in designated Target Areas. If you're purchasing in a targeted county or neighborhood and meet one of these conditions—you're a single parent with minor children or you own a home that doesn't meet building codes and cannot be brought into compliance—you may not need to be a first-time buyer.

Income Limits: Your household income cannot exceed 80 percent of the area median income (AMI) for your county. These limits vary by county and are updated annually, so verify the current threshold for your area with a participating lender.

Homebuyer Education: All borrowers applying for HOMEstead must complete in-person homebuyer education at a PHFA or HUD-approved agency. This requirement applies regardless of credit score and ensures you understand the responsibilities and benefits of homeownership.

Program Affiliation: You cannot be employed by or have a direct relationship with the Pennsylvania Department of Community and Economic Development or PHFA if you've participated in HOMEstead administration or have inside knowledge of the program.

Property Requirements

The property must meet specific standards to qualify:

Lead-Based Paint: Existing homes must have been built after 1978 due to federal lead-based paint regulations. Homes built before 1978 may qualify if they're being purchased from a local housing authority or non-profit that certifies the absence of lead-based paint, or if an FHA appraisal confirms no chipping, peeling, or cracking paint.

Acquisition Cost: The total acquisition cost—including the purchase price plus repair costs—cannot exceed the HOMEstead program limits for your county. These limits reflect the program's focus on modest, affordable housing.

Property Type: Only single-family, owner-occupied residences are eligible. The borrower must occupy the property as their principal residence within 60 days of closing.

Appraisal Requirements: An FHA appraisal is required for existing homes, and a Direct Endorsement (DE) underwriter must review the appraisal. A property inspection checklist must be completed by the appraiser and submitted with the appraisal. The appraiser charges an additional inspection fee not to exceed $150, which can be included in the HOMEstead assistance amount.

Utilities and Systems: All mechanical systems must be operational. For properties with private water or sewage systems, specific certifications are required. Public water and sewer must be used if available.

Geographic Eligibility

HOMEstead funds are not available in all areas of Pennsylvania due to HUD regulations. Some municipalities known as Participating Jurisdictions (PJs) receive their own HOME allocations and don't have access to PHFA-administered HOMEstand funds. Lenders can identify eligible areas by consulting PHFA's appendices or contacting PHFA directly. If your desired property is in a PJ area, check with your local housing authority about alternative assistance programs.

How HOMEstead Funds Work

At Closing

When your loan closes, PHFA funds are received and disbursed to cover your approved assistance needs. The lender disburses only the actual assistance amount needed, up to the maximum approved by PHFA. Cash back to the borrower is limited to $100 in excess of reimbursement for prepaid items.

You'll sign a Subordinate Mortgage Note and Mortgage Instrument for the HOMEstead loan amount in PHFA's name. This second lien mortgage is recorded immediately behind your first mortgage. There are no assignment requirements since the loan closes directly in PHFA's name.

After Closing

Following closing, you'll receive documentation confirming your HOMEstad assistance amount. The purchase package submitted by your lender includes a copy of the HUD-1 Settlement Sheet or Closing Disclosure verifying the exact amount of assistance disbursed. If any approved funds remain unused, they're refunded to PHFA, and the loan amount is reduced accordingly.

Forgiveness and Repayment

The HOMEstead mortgage is a non-interest-bearing loan with no monthly payment. The loan is forgiven on an annual basis over five years at a rate of 20 percent per year. This means:

  • Year 1: 20 percent forgiven
  • Year 2: 20 percent forgiven
  • Year 3: 20 percent forgiven
  • Year 4: 20 percent forgiven
  • Year 5: 20 percent forgiven (loan fully forgiven)

If you sell, transfer the property, or cease to occupy it as your principal residence before the five-year period ends, the remaining unforgiven balance becomes due and payable. However, if you inherit the property or transfer it to a spouse, the loan remains in place without being due.

Working with Lenders and the Application Process

To apply for HOMEstand assistance, you must work with a PHFA-approved participating lender. The lender locks both your first mortgage and HOMEstead assistance simultaneously through PHFA's Pipeline Plus system when you lock your rate.

During the underwriting process, your lender completes a Needs Assessment Form to determine the appropriate assistance amount based on your financial situation and the property's purchase price. The lender's underwriting package submitted to PHFA for pre-closing approval includes this assessment.

Once PHFA approves your application, the agency forwards funds via ACH to your lender. The closing cannot occur before the Pre-Closing Eligible Date on PHFA's approval notification.

Combining HOMEstand with Other Programs

HOMEstand can often be combined with other PHFA assistance programs or with assistance from local government agencies and non-profit organizations. However, ensure that all other available funds are utilized first before HOMEstead assistance is applied. This approach maximizes the program's impact and ensures funds are used efficiently.

Why Choose HOMEstead?

For Pennsylvania families working to achieve homeownership, HOMEstead offers significant advantages:

  • No Monthly Payment: The assistance requires no monthly mortgage payment, improving your ability to afford housing
  • Forgiveness: The loan forgives over five years, reducing your debt obligation automatically
  • Flexible Use: Funds can cover downpayment requirements, closing costs, or both
  • Front-End Ratio Help: Assistance can help lower your front-end housing ratio to make homeownership affordable
  • Combined with Strong First Mortgages: HOMEstead pairs with PHFA's competitive first mortgage products offering fixed rates and 30-year terms

Getting Started

If you're a first-time homebuyer in an eligible Pennsylvania area and your income falls within program limits, HOMEstead may be available to you. Begin by contacting a PHFA-approved participating lender. They can verify your eligibility, estimate your assistance amount, and guide you through the application process. Many lenders can also connect you with PHFA-approved homebuyer education providers to satisfy this program requirement.

For more information about HOMEstead, current income limits by county, and lists of approved lenders and counseling agencies, visit the Pennsylvania Housing Finance Agency website or call 717.780.3871.

Conclusion

The HOMEstead Program removes a significant barrier to homeownership by providing downpayment and closing cost assistance to eligible first-time buyers. With forgivable loans, no monthly payments, and a commitment to helping Pennsylvanians achieve stable, affordable housing, HOMEstead stands as a powerful resource for families ready to buy their first home. If you're serious about homeownership, HOMEstead deserves your attention.

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