How to Buy Your First Home in Kentucky with KHC Down Payment Assistance
To buy your first home in Kentucky using KHC down payment assistance, you must complete these steps in the right order: calculate your KHC compliance income before selecting a lender, determine which KHC program track you qualify for, decide whether to stack with the FHLB Welcome Home grant and municipal DPA, select a KHC-approved lender, and prepare for an attorney-supervised closing under KBA Opinion U-58. Skipping step one — compliance income — is the most common reason Kentucky buyers get rejected by KHC after their lender has already pre-approved them.
Before You Contact a Lender: Calculate Compliance Income
Standard mortgage pre-approval uses qualifying income. KHC down payment assistance uses compliance income. They are different calculations and produce different numbers.
Qualifying income (what your lender uses): Your verifiable personal earnings from the past two years — salary, wages, and documented bonuses. Used to calculate DTI and determine loan amount.
Compliance income (what KHC uses): The gross income of every adult living in your household, regardless of whether they are on the mortgage note. This includes:
- Your spouse's income, even if they are not on the loan
- An adult child's wages if they live in the home at the time of application
- Car allowances and employer-paid benefits
- Overtime and commissions — even if received for less than two years and excluded by your lender
- Part-time secondary employment
Why it matters: KHC's county-specific income caps range from $147,350 to $195,650 depending on county and program track. If your compliance income exceeds the cap for your chosen program, you are ineligible — period. No compensating factors override an income cap.
How to Calculate Your Compliance Income
- List every adult who will live in the home at closing
- For each adult: calculate their gross annual income from all sources (before taxes, before deductions)
- Include all employment income, self-employment net income, rental income, Social Security, disability, pension, and any regular benefit payments
- Include car allowances and employer reimbursements treated as income
- Include overtime and commissions regardless of how long they have been received
- Sum all amounts
Compare this total against the KHC income limits for your county and the program track you are targeting. Limits differ between the MRB program (stricter, designed for lower-income buyers) and the Secondary Market program (broader income eligibility).
If your compliance income exceeds the KHC cap, check Louisville Metro DPA or Lexington REACH HOME — these programs have their own income limits and do not use KHC compliance income methodology.
Step 1: Determine Which KHC Program Track You Qualify For
KHC offers two primary first mortgage funding channels — Mortgage Revenue Bond (MRB) and Secondary Market — with different income limits, down payment requirements, and PMI structures.
| Program | Down Payment | Minimum Credit Score | Income Limit | PMI Structure |
|---|---|---|---|---|
| Conventional Preferred | 3% | 660 | 80% AMI (county-specific) | Charter Coverage (reduced PMI) |
| Conventional Preferred Plus 80 | 3% | 660 | Up to $147,350–$195,650 (county-specific) | Standard PMI |
| KHC FHA | 3.5% | 620 | KHC secondary market limits | FHA MIP |
| KHC VA | 0% | 620 | KHC secondary market limits | None (VA funding fee applies) |
| KHC USDA/RHS | 0% | 620 | USDA rural area income limits | USDA guarantee fee |
Conventional Preferred is the most financially advantageous for buyers who qualify. It uses "Charter Coverage" PMI — a reduced coverage requirement that lowers the monthly PMI premium compared to standard conventional loans at 97% LTV. At 97% LTV, Charter Coverage requires 18% PMI coverage versus 35% standard — a difference that saves hundreds of dollars per year.
If your compliance income exceeds 80% AMI but falls under the secondary market cap, you move to Conventional Preferred Plus 80 with standard PMI.
If your credit score is below 660, FHA (620 minimum) is your KHC option, but it comes with FHA Mortgage Insurance Premium for the life of the loan and a 3.5% down payment requirement.
Step 2: Choose Your Down Payment Assistance
Once you know your program track, select your DPA combination.
KHC Regular DAP
- Up to $12,500 as a 15-year, fully amortizing second mortgage
- Current interest rate: published by KHC (historically 3.75%–5.5%)
- No minimum buyer contribution required
- Creates a second monthly payment — model it against the 50% DTI cap before proceeding
- Available across Kentucky wherever KHC programs operate
KHC Affordable DAP
- Up to $7,500 as a 10-year, fully amortizing second mortgage
- Fixed rate: 1.0%
- Requires meeting stricter lower-income eligibility (typically below 80% AMI)
- Lower second mortgage payment reduces DTI pressure
- Best option for buyers who qualify — the 1% rate makes it the most affordable second mortgage in the state
FHLB Welcome Home Grant
- Up to $20,000 as a forgivable grant (not a loan)
- 5-year retention agreement — pro-rated repayment if you sell before 5 years
- Minimum $500 buyer contribution required
- First-come, first-served; apply in early spring when funds open
- Can be stacked with KHC DAP — they operate under different lien structures
Louisville Metro DPA (Jefferson County buyers only)
- 0% interest loan
- 50% forgiven after the occupancy compliance period
- 50% deferred until sale, refinance, or transfer — no monthly payment
- Income limits: $54,000 to $89,450 depending on household size
- Minimum $500 buyer contribution required
Lexington REACH HOME (Fayette County buyers)
- Up to $30,000 for 3-person-or-larger households
- Non-repayable subsidy
- Income-restricted, applied through Fayette County programs
- Contact Lexington Fayette Urban County Government for current availability
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Step 3: Model the 50% DTI Cap
KHC enforces a strict 50% debt-to-income cap on all programs. AUS approval at 54% or 55% does not override this. Calculate your combined DTI before proceeding with a KHC-approved lender:
Monthly gross income: Sum all qualifying income sources ÷ 12
Monthly debt payments: Add all minimum monthly debt obligations (car payments, student loans, credit card minimums) + proposed first mortgage PITI + proposed KHC second mortgage payment
DTI ratio: Monthly debt ÷ Monthly gross income
If this ratio exceeds 50%, you have three options:
- Use Affordable DAP (1% rate, lower second payment) instead of Regular DAP
- Reduce the loan amount (lower purchase price)
- Pay down existing debt before application to reduce monthly obligations
Do not assume your lender will catch this problem — some KHC-approved lenders do not run the compliance income or DTI analysis before submission, and the rejection comes from KHC underwriting, not from the lender's pre-approval.
Step 4: Select a KHC-Approved Lender
Not all lenders process KHC loans. You must use a KHC-approved lender to access KHC first mortgage programs and down payment assistance. KHC maintains a list of approved lenders on its website.
When evaluating lenders, ask:
- Do you process both KHC Regular DAP and Affordable DAP?
- Do you also participate in the FHLB Cincinnati Welcome Home program?
- Have you closed KHC + Welcome Home stacked purchases in my county?
- What is your typical KHC closing timeline?
A lender who processes only one KHC product cannot optimize your program combination. A lender familiar with Welcome Home stacking can potentially eliminate your cash-to-close entirely.
Step 5: Make an Offer and Manage the Inspection Contingency
Once pre-approved, your KAR (Kentucky Association of Realtors) purchase contract includes several sections relevant to your DPA strategy:
- Section 1 (Purchase Price): Sets the basis for all DPA calculations
- Section 2 (Financing Terms): Specify KHC loan and DAP — your agent should note KHC financing to avoid seller confusion
- Section 5 (Inspection Contingency): Critical for geological hazard testing — radon, foundation, and mine subsidence if applicable
- Section 19 (Seller Concessions): Negotiate seller-paid closing costs to reduce the amount KHC DAP must cover
Under KRS 324.111, earnest money must be deposited within 3 business days of contract execution.
Geological Hazard Testing During Inspection Contingency
Kentucky has four geological hazard categories. Test for each as appropriate to the property location:
| Hazard | Where to Test | What to Do |
|---|---|---|
| Radon | Statewide, especially central/northern KY (EPA Zone 1) | 48-to-96-hour test; action level 4.0 pCi/L; sub-slab depressurization system ($800–$1,500) |
| Limestone karst wet basement | Fayette, Warren, Jessamine, Woodford, statewide | Look for efflorescence, sump pump condition, hydrostatic cracks |
| Expansive clay foundation | Jefferson, Bullitt, Oldham counties | Inspect stair-step brick cracks, sticking doors, sloped floors — hire structural engineer ($500) |
| Coal mine subsidence | 37 designated coal counties in Eastern and Western KY | Verify KMSIF insurance is active; never waive the mandatory endorsement |
Step 6: Attorney Closing Under KBA Opinion U-58
Kentucky requires a licensed attorney at every closing. This is not optional. Under KBA Opinion U-58, only a licensed attorney may:
- Conduct the title examination
- Draft deeds, mortgages, and promissory notes
- Issue a formal title opinion letter
Non-attorney settlement agents may coordinate signatures but cannot answer legal questions or interpret documents.
Budget for attorney closing costs:
- Attorney closing supervision fee: $400 to $800
- Title search and examination: $150 to $350
- Title insurance premium: varies by purchase price
- Recording fees with county clerk: $50 to $150
Total transaction closing costs for a Kentucky first-time buyer using KHC programs: typically 2% to 5% of purchase price, before DPA and seller concessions.
Dower and Curtesy: The Spousal Signature Requirement
If you are married, your non-titled spouse must attend closing to sign the mortgage document, even if they are not on the loan. Under KRS 392.020, a spouse acquires an inchoate interest in all real property owned by their partner. Under KRS 386.095, this interest can only be released within a deed or mortgage document — not through a standalone waiver.
Without the non-titled spouse's signature:
- The lender cannot hold a first-priority lien
- The title is permanently clouded
- You cannot sell or refinance until a corrective deed is executed
Confirm your spouse's availability for the closing date before scheduling. This requirement catches buyers by surprise when their lender (from a non-attorney-closing state) did not mention it.
Step 7: Close and Record
The closing timeline for a KHC purchase in Kentucky runs 30 to 45 days from executed contract. This includes:
- KHC file submission and underwriting (10 to 14 days)
- Attorney title examination (7 to 14 days)
- Title opinion letter issuance
- Closing Disclosure delivery (3-day mandatory review period)
- Final walkthrough within 48 hours of closing
- Closing with attorney present
- Deed recordation with county clerk
Transfer tax in Kentucky is $0.50 per $500 of purchase price, paid by the seller.
After closing, the Welcome Home grant clock starts on its 5-year forgiveness period. The KHC DAP begins amortizing with monthly payments. If you stay for 5 years, the Welcome Home grant is fully forgiven — your only remaining obligation is the KHC second mortgage.
Who This Is For
- First-time buyers in Louisville, Lexington, or Northern Kentucky who want a clear step-by-step process for using KHC programs correctly — not just a description of the programs
- Buyers who have been pre-approved by a lender but have not yet verified compliance income against county caps
- Buyers who want to understand whether Welcome Home grant availability affects their timing — if spring application windows are open, applying before under-contract saves time
- Anyone purchasing in a KHC-covered county with a household income between $45,000 and $150,000 who wants to maximize the financial outcome
Who This Is NOT For
- Buyers whose compliance income exceeds all KHC program caps and who are using conventional loans with standard down payments
- Cash buyers with no interest in financing programs
- Buyers refinancing an existing mortgage (KHC DAP is purchase-only)
Frequently Asked Questions
What is the first step to using KHC down payment assistance? Calculate your compliance income before contacting a lender. This is the gross income of all adult household members, not just the borrower. Compare it against the KHC county income limits for both the Conventional Preferred (80% AMI cap) and Conventional Preferred Plus 80 (secondary market cap) program tracks. This single calculation determines which programs you are eligible for and how much assistance you can receive.
Can I get rejected by KHC even if my lender pre-approved me? Yes. Your lender's pre-approval uses qualifying income. KHC's underwriting uses compliance income. If KHC's compliance income calculation puts your household over the county cap, KHC will reject the file regardless of your lender's approval. This rejection comes late in the process — typically after you are under contract — which is why calculating compliance income first is essential.
What happens if my DTI is above 50% with KHC DAP included? KHC will reject the file. You have three options: switch to Affordable DAP (lower second mortgage payment at 1% interest), reduce your loan amount (lower purchase price or larger down payment), or pay down existing debts before application to reduce your monthly obligations. A lender who identifies this problem before submission can help you restructure.
Can I negotiate seller concessions to reduce my cash-to-close further? Yes. Seller concessions (seller-paid closing costs) are allowed under KHC programs and do not conflict with DAP or Welcome Home grants. A common strategy is to negotiate the seller to pay attorney fees and prepaids, use the Welcome Home grant for the down payment, and use KHC DAP for any remaining closing costs — resulting in near-zero out-of-pocket expenses.
How long does it take to close a KHC loan with down payment assistance? Plan for 35 to 45 days from executed contract to closing. KHC underwriting and the attorney title examination add time that many out-of-state lenders do not quote. Work with a KHC-approved lender who is familiar with Kentucky's attorney closing process and regularly submits KHC DAP files.
The Kentucky First-Time Home Buyer Guide covers the complete compliance income calculation, KHC program matrix, three-source stacking strategy, DTI modeling against the 50% cap, attorney closing walkthrough, and geological hazard inspection protocols — structured as a step-by-step reference you own before you sign a contract.
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