Here's How to Buy a Home If You Can't Save for a Down Payment
With millions of Americans facing financial burdens like student loans and high rents, saving up to make the traditional 20% down payment on a first home can be daunting. There's good news for prospective home owners: You don't need to do it.
Forty-six percent of millennials and 40% of Americans overall cited affording a down payment as their greatest financial barrier to home ownership, a recent Country Financial survey found.
You can blame the difficult financial circumstances many young people find themselves in today. But misconceptions may be part of the problem too. Nearly half of renters said they believe they need at least a 20% down payment to buy a house, according to Bank of America’s 2018 Homebuyer Insights Report, despite the fact that the government and most housing experts disagree.
“There’s a prevailing thought out there that you need to put 20% down in order to purchase a home, which is absolutely not the case,” says Todd Sheinin, a loan officer at Homespire Mortgage in Gaithersburg, Md.
Of course, there are downsides to buying a home with little down. One is that you probably have to pay private mortgage insurance, or PMI, an extra fee designed to compensate lenders in case you default. Another is that you face greater risk of going "underwater" if house prices fall, potentially locking you into your home.
Still, nationally more than half of recent home buyers said they put down less than 20% on a mortgage, according to Zillow’s 2019 Consumer Housing Trends Report. In addition, a December survey by the National Association of Realtors found that 76% of first-time buyers put down less than 20%
Here are five types of mortgages that will let you purchase a home with less than 20%—with some allowing for down payments as low as 0%.
Conventional 97 loan
Before 2013 you needed to make at least a 5% down payment to qualify for a conventional mortgage — a loan not backed by a special government program — but that changed when Fannie Mae and Freddie Mac rolled out the Conventional 97 loan program. “These loans were started as first-time home buyer loans, but now they’re available to all home buyers,” says Sheinin.
Conventional 97 loans allow you to put 3% down on a home. They charge private mortgage insurance — typically between 0.4% and 1.5% of your loan amount, Sheinin says — but you can have your lender cancel PMI once you’ve gained at least 20% equity in your home.
You’ll need a credit score of at least 620 to qualify. Some mortgage lenders may require a higher credit score, says Guy Cecala, chief executive and publisher of Inside Mortgage Finance.
The U.S. Department of Veteran Affairs offers VA loans that give active or retired military — or a veteran’s surviving spouse — the ability to buy a home with no money down. Moreover, “VA loans have phenomenal interest rates and flexible lending guidelines,” Sheinin says. Although the VA does not set a minimum credit score, most VA mortgage lenders require you to have a score of at least 580.
The caveat? VA loans require you to cover a funding fee of 2.3% of your loan, which can be paid either upfront or it can be rolled into your mortgage payments.
Federal Housing Administration (FHA) loans were created for low- and moderate-income households that would otherwise be locked out of the housing market, says Keith Gumbinger, vice president at HSH.com, a mortgage information website. They require a minimum down payment of 3.5% and a minimum credit score of 580, but borrowers with a credit score of 500 to 579 can qualify by making a 10% down payment.
The drawbacks? You have to pay an upfront mortgage insurance premium of 1.75% of your loan amount, plus a monthly premium added to your mortgage payments that ranges from 0.45% to 1.05% of your loan amount per year. And the FHA will only offer loans up to the maximum loan limit in the county in which your home is located. (You can view the FHA loan limits for your county at Hud.gov.)
Geared toward low-income home buyers, U.S. Department of Agriculture Rural Development (USDA) loans are offered to home buyers in select towns with populations of 10,000 or less. (You can check the USDA’s website to see whether yours is eligible.) They offer competitive interest rates and allow for down payments as low as 0%.
However, you must pay a mortgage insurance fee of 2% of your loan amount at closing and a mortgage insurance premium of 0.5% of your loan. Also, your preferred lender may not offer USDA loans, Gumbinger cautions. (You can view a list of its approved lenders online.)
Have a medical degree? You may qualify for a low-interest physician loan (also referred to as a “doctor loan”) that allows you to make a down payment as low as 0% (loans above $750,000 require a low down payment) and doesn’t require you to pay mortgage insurance. Another perk: unlike with a conventional loan, student loan payments that are in deferment do not affect whether you qualify for a physician loan. “Mortgage lenders love writing a loan to doctors, because doctors generally don’t default on mortgages and their income typically goes up over time,” Cecala says.
Most physician mortgage lenders require a credit score of 680 or higher. Only a select number of lenders offer them, so you may have to shop around. Note: physician loans are available to only a select group of doctors, including medical physicians (MD), doctors of osteopathy (DO), dentists (DDS/DMD), veterinarians (DVMM), and, in some cases, podiatrists (DPM) and optometrists (OD).
A word on down payment assistance programs
Still don't have enough cash socked away for a down payment? You may qualify for a down payment assistance program that will provide you money to cover a portion, or potentially all, of your down payment. These programs are available at the local, state, and federal levels. There are more than 2,500 programs nationwide, so your best approach is to have your mortgage lender help you assess your options and eligibility.
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