Analysis
Low Down Payment Options
How much am I going to need for a down payment? This is one of the first questions that comes to mind for almost every first-time home buyer. You’ve probably seen posts saying you don’t have to put 20% down anymore — and that’s true. Let’s walk through a few of the main options that most buyers look at when they want to purchase a home with the lowest cash out of pocket.
100% Financing Options
Let’s start with the easy part: there are a couple of options that regularly require no down payment at all.
The first is the VA home loan. The requirement here is straightforward — you must be a veteran. And if you are, the VA loan is the best option about 99.9% of the time. We do compare it against other loan types from time to time, but it far and away offers the most benefits for the buyer.
The other 100% financing option is the USDA loan. These loans come with income limits and geographic restrictions, since they’re designed to support rural development. USDA loans are a terrific option for anyone looking to purchase a home outside of major metropolitan areas.
Conventional Options
Conventional loans have a couple of paths for buyers looking for a low down payment.
First-time home buyers — meaning anyone who hasn’t owned a home in the last three years — can get a conventional loan with as little as 3% down. There are no income limits and no geographic requirements. There’s also a second tier to this program: if your income is below 80% of the area median, you could qualify for a lower rate and reduced mortgage insurance costs.
But what if you’re not a first-time buyer? People who have owned a home before can still get a conventional loan with as little as 5% down, depending on credit score. This is still a very viable option for buyers who would rather keep their assets and reserves than put extra cash into the home upfront.
FHA Loans
The final option — and probably the one used more than any other for first-time buyers — is the FHA home loan. The Department of Housing and Urban Development insures these loans with just 3.5% down.
What makes FHA such a strong option for buyers looking for a low down payment is that it comes with more lenient underwriting guidelines than conventional loans. Because FHA loans are federally insured, lenders can also offer lower rates to buyers with mid-to-low credit scores, since much of the risk is covered through the FHA mortgage insurance program.
Other Options to Explore
There are additional low down payment and first-time buyer programs out there, but many of these are local or state-based, and not everyone will qualify. If you think you might be eligible for some kind of assistance program, the best thing to do is ask your loan officer what’s available in your city or state.
Common questions
Where should I start?
Your monthly budget. The best thing to do is think about where you want your monthly payment to be. Whether it’s the same as your rent or what you feel is comfortable, start there and we reverse engineer a purchase price for you.
How do you choose between Conventional and FHA?
Usually credit score is the factor. Conventional loans tend to have a more favorable monthly payment for higher credit scores. The main difference is the mortgage insurance. For high credit borrowers the private mortgage insurance is less than FHA mortgage insurance.
Why do we need mortgage insurance?
For loans with less than 20% down, mortgage insurance is generally required. Low down payment loans are a higher risk for the lender so the mortgage insurance protects the lender in case of default. If we didn’t have mortgage insurance then low down payment options would either cost more or would be much more rare.