For someone who is thinking of buying a first home, the idea of saving enough money for a 20% down payment can be daunting. The good news is a first-time buyer can purchase a home with as little as 3% down – and even no down payment in some cases.
"The narrative that in order to buy a house in America today you need 20% down is just not true," says Marietta Rodriguez, president and CEO NeighborWorks America, a national nonprofit focused on community development and homeownership, and a former U.S. News contributor. "There are a lot of different products that offer low down payment options."
If you qualify for a mortgage, you may qualify for one with a lower down payment, though some options are only available to those with good credit. But you will pay more over the life of the loan. That's partly because if you pay less upfront, your mortgage balance is higher. Another reason is if you don't make a minimum down payment of 20%, you will usually be required to pay private mortgage insurance.
Lower Your Down Payment With Private Mortgage Insurance
PMI, as it is commonly known, protects the lender if you default on your home loan. On a conventional loan, it's usually added to your monthly payment. For loans offered by the Department of Veterans Affairs, the U.S. Department of Agriculture and the Federal Housing Administration, mortgage insurance is handled differently.
"The less you put down, the higher the mortgage insurance is," says Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage" and a mortgage professional in the San Francisco Bay Area. "With 5% down, the mortgage insurance is quite high."
The cost of private mortgage insurance depends on your credit score and the size of your down payment. Freddie Mac estimates the cost at $30 to $70 per month for each $100,000 borrowed. If you buy a $250,000 home with 10% down and a 30-year fixed rate of 4.5%, you'll pay $95.63 a month in PMI (at a rate of 0.51%), in addition to the $1,140 monthly principal and interest payment (taxes and insurance are added on top of that). However, with 20% down, you'll pay $1,013 per month for the same property.
If you need to pay PMI, you may need to consider a slightly smaller loan to allow for the bigger payment. With a conventional mortgage, you can get an appraisal and write to your lender and ask to have the PMI removed once you have more than 20% equity in the home. With FHA loans, PMI lasts for the lifetime of the loan.
"Anyone with decent credit can get a loan," Fleming says. "The limiting factor will always be the PMI."
If you have a choice, should you make a bigger down payment to avoid PMI? It depends on your personal circumstances. You need to make sure you have enough cash on hand for closing costs and repairs. Some lenders will require a certain level of reserves before they will grant the mortgage.
"There's really no hard and fast rule out there," Rodriguez says. "Inasmuch as they have a choice, and have something to put down, they can run through different scenarios."
Save More Than Your Down Payment Amount
Even with no down payment, homebuyers still need some cash to cover closing costs and upfront costs, such as a year's worth of taxes and insurance. Some loan programs allow buyers to use a contribution from the seller or a gift from family for closing costs and down payments, but others do not.
"That means you need to be putting money aside," says Sandee Rains, a financial education specialist in Tampa, Florida, with the nonprofit ClearPoint Credit Counseling Solutions.
If you're considering buying a home, it's smart to meet with a mortgage officer or broker before you start looking at property. "Sit down with somebody who can show you what all the costs are really going to be," Fleming says. A good mortgage broker can help you weigh your options and decide how large a down payment to aim for, as well as which loan program is the best option.
Rodriguez suggests consulting a financial advisor who can examine your financial life in its entirety. "It's really to help you plan your financial future," she says. "Homeownership might be only one of those goals."
Rodriguez and Rains also recommend checking with local authorities for programs that offer assistance with down payments and closing costs. "There's just a lot going on in communities that people aren't aware of," Rodriguez says.
Some programs provide down payment assistance as a silent second mortgage, with no payments due until the home is sold or refinanced. Other programs offer grants or forgive the loan once you live in the home for a certain amount of time. "If someone qualifies for any down payment assistance, they should go for it," Rains says.
Here are four types of loans you can get with a low down payment, which may be especially appealing to first-time buyers:
- Conventional mortgage.
- Federal Housing Administration loan.
- U.S. Department of Veterans Affairs.
- U.S. Department of Agriculture.
A quality lender or mortgage broker will offer all these options and help you figure out which is the best fit for your situation. Some programs also set standards for the home or condo, including a maximum price and the condition of the home.
Fannie Mae and Freddie Mac will back loans with down payments as low as 3%. You will need solid credit to get these loans, but they will be cheaper than an FHA loan. The more you put down, the less your PMI. If your lender says it doesn't offer those loans, you should shop around.
Federal Housing Administration Loan
The FHA has long backed loans with down payments as low as 3.5%. It accepts buyers with lower credit scores and those with thinner credit records. Buyers are required to pay a mortgage insurance premium of 1.75% of the loan amount upfront, though it can be financed. There is also a monthly mortgage insurance premium for as long as you have the loan, which averages about $70 for every $100,000 borrowed. The FHA also offers the 203(k) loan, which can be used to both buy and rehab a home at the same time.
U.S. Department of Veterans Affairs
If you served in the military, you can get a VA loan with no down payment. You're required to pay a funding fee of 2.15% of the loan amount upfront instead of PMI, which can be financed. If you have a service-connected disability, the funding fee is waived. You still have to qualify for the loan based on income and credit, but the interest rate is likely to be lower than a conventional or FHA rate, plus there is no monthly PMI. "It's a really good program," Fleming says.
U.S. Department of Agriculture
The USDA guarantees loans with nothing down in rural and suburban areas to those who meet income and other qualifications, and the rates are often lower than those of conventional loans. The USDA charges an upfront mortgage insurance premium of 2% of the loan amount, which can be financed. After that, the charge is about $33 a month per $100,000 financed.
Are these must-haves on your list?
One of the first steps you take when deciding you want a new home is determining what you need in order to be happy there. The list of your must-haves can get long, and you reasonably can’t expect to find a house that perfectly matches all your criteria. “Someone has a list of 10 things – if they can find a house that has seven or eight of those, they’re doing pretty good,” says Jeff Plotkin, a Texas-licensed Realtor, attorney, certified public accountant and vice president of Habitat Hunters Inc. in Austin, Texas. Deciding what needs win out in your next home search can be tough, but there are a few key features and amenities many buyers seem unwilling to live without.Right in your price range
Right in your price range
Being able to afford your new home is a given, but buyers are often faced with having to choose between stretching their budget to have the master suite they want or having more reasonable monthly mortgage payments. Price often wins out in the end – you’re less likely to enjoy that master suite if you’re eating soup and foregoing vacations for the next five to 10 years to pay it off. In the 2018 National Association of Realtors Home Buyer and Seller Generational Trends report, home affordability was one of the three most important factors for respondents who recently purchased a home – behind only quality of the neighborhood and a location's convenience to work.In your preferred location
In your preferred location
Homebuyers care a lot about being able to get from point A to point B – as well as points C, D and E. Your future neighborhood can dictate what school your kids go to, how long it takes to get to work and how easy it is to stop at the grocery store when you forgot an ingredient for dinner. Plotkin says buyers put a lot of stress on where the house is, rather than what’s in the house itself. They’re looking for “proximity to schools, shopping, entertainment, public transportation,” he says.Interior over curb appeal
Interior over curb appeal
A handsome exterior keeps potential buyers from quickly driving away, but insight from new construction marketing site HomLuv.com reveals that it’s the interior that most often serves as the deal-maker. HomLuv’s website allows homebuyers to begin their search for a new home from the room they care about most, whether that’s the kitchen, living room or master bathroom. The one part of the house people don’t seem too worried about? Outside. In the roughly two months since HomLuv launched, “no one has chosen to look at exteriors first,” says Mark Law, vice president of product management for BDX, a home builder marketing company and parent company of HomLuv.The right number of bedrooms
The right number of bedrooms
While the interior of the home allows more wiggle room to compromise on your needs, there are some details that buyers must have. The right number of bedrooms would be the big one. Family expansion is often a primary reason homeowners start looking for a new house, so leaving out that extra room would defeat the entire purpose of the sale. According to the NAR report, 85 percent of homes purchased by respondents in 2017 had three bedrooms or more.Window treatments for reference
Window treatments for reference
Staging matters in a home. As much as we think we can picture how a vacant house will look with our own furnishings and decor, at the end of the day we need some suggestions. Law says builders will include big picture windows in bedrooms or over the tub in a master bathroom to let in natural light, but if the photos show the space without curtains or blinds, house hunters will inevitably see a design flaw. “They’ll say, ‘I’m not an exhibitionist,’” he explains. To avoid turning homebuyers off, window treatments should be included in listing photos and for home tours.Move-in ready
The condition of the home you shop for often goes hand in hand with your budget and the neighborhood you hope to live in. If your budget is at the lower end of the price range in the hottest community in town, you’ll likely find yourself buying a house that needs a little love. If your budget doesn’t restrict it, chances are you’ll have your pick of properties that have been turned by real estate investors. “The [buyer] demand is for 100 percent move-in ready condition,” says Bobby Montagne, CEO of Walnut Street Finance, a private money lender focused on home flipping in markets in Virginia, North Carolina and the District of Columbia metro area.Possible to picture your vision
Possible to picture your vision
Even if you’re one of the detractors who prefers a fixer-upper, it’s still necessary to be able to envision how the space will look once you’ve added your personal touches. Based on reactions from HomLuv users, details as small as the cabinet color in a photo can change the way a person thinks about a house. Law says he’s found preferences differ from region to region – darker cabinets may see more love in the South, while in California the preference is for white kitchen cabinets. “You could offer a free puppy and free pots and pans with the house, but if the cabinets are dark they still don’t want it,” he says.Warranty available
For newly built homes and those that have been recently flipped with significant work, you want to know that the professionals involved stand by their work. New construction homes often come with a warranty from the builder or the option to get a third-party warranty, and you should ask the investors involved with a flip for the same level of protection. “A good builder [or] a good flipper does not have a problem with that,” Montagne says. If an issue arises within the life of the warranty related to the workmanship, you can rest easy knowing you’re covered financially for the repairs.Potential for value growth
Potential for value growth
Your home isn’t just where you’ll live – it’s also an investment. There are a few easy decisions you can make that reduce the chances of losing out on potential growth in value over time, whether that means buying in a neighborhood where home values are steadily growing, finding a home in a desirable school district or avoiding living next to a strip mall. “When you’re buying a house, you’re not only buying it for yourself, you’re buying it for resale,” Plotkin says. “So most people are not going to want to back up to commercial [property] or a busy road.”Read More
Updated on May 3, 2019: This story was originally published on Jan. 20, 2016, and has been updated with new information.