Low Down Payment Mortgage

Are you looking to buy a home, but don't have a lot of cash for a down payment? Forget about the 20% myth. You don't need a big down payment. You can buy a house with as little as 3% down, or even less if you qualify for a special loan program or a down payment assistance program. 

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What is a Low Down Payment?

Your down payment is an integral part of purchasing a home. Lenders require that you put some of your own money (equity) into the purchase. They use a formula called the Loan to Value Ratio (LTV) to help determine their risk level. For example, if you buy a $250,000 home and put down $25,000, then the LTV is 90%, and your equity portion is 10%, or a 10% down mortgage.

Here are a few examples to help you understand how this works for a low down payment mortgage. The numbers don't take into consideration other lending considerations such as debt to income ratio, credit score, etc.

If you Have a Down Payment Available of $10,000, then you can purchase a home, with these down payment values:

3% Down (97% LTV):   $333,333

5% Down (95% LTV):  $200,000

10% Down (90% LTV): $100,000

20% Down (80% LTV): $50,000

If you are considering purchasing a house, you might want to set a budget and start saving for a specific down payment. For example, if you're going to purchase a home for $350,000 and are looking for a low down payment of 5%, then you need to save $17,500.

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The 20% Down Payment Myth

Fact:  There are many programs that allow for a very low or no down payment. However, many potential homebuyers are not familiar with the many low down payment programs. 

According to a 2018 study, Barriers to Accessing Homeownership Down Payment, Credit, and Affordability, down payments is one of the biggest barriers to purchasing a home. 

Here are a few highlights:

  • Renters see the inability to save for a down payment as one of the leading obstacles to homeownership.
  • 66% percent of the respondents said that it would somewhat to very difficult to save for a down payment
  • 65% of non-owners thought that you need more than 15% down payment, and an astounding 39% believe that you need more than 20%.
  • 72% of the respondents were not too familiar or not familiar at all with down payment programs
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Mortgage Insurance: PMI and MIP

Do you need mortgage insurance? In general, low down payment loans do require some sort of mortgage insurance.

For example, all FHA purchase loans require mortgage insurance, which includes a monthly premium and an upfront fee. 

Conventional loans, such as Fannie Mae's HomeReady, and Freddie Mac's Home Possible both require private mortgage insurance, although they do have special programs for low to middle-income borrowers in certain geographic areas. There are no upfront fees.

One exception is VA loans; however, these are restricted to military personnel and veterans with an eligibility card.

For more information about Private Mortgage Insurance...Read More

 

Six Low Down Payment Programs You Need to Know About
  1. FHA Purchase Loan

    FHA Loans allow you to purchase a home with a down payment as low as 3.5%. They are very popular loans among first-time homebuyers because the program requires a minimum credit score of 580 if your LTV is over 90% and only 500 if your LTV is 90% or less. All FHA loans require an upfront mortgage insurance charge, which can be added to the loan and paid off over thirty years. Low down payment FHA loans have monthly insurance payments that are paid for the entire duration of the loan.

    Read more >
  2. Fannie Mae - HomeReady

    The HomeReady Mortgage offered by Fannie Mae is an attractive alternative for low to middle-income homebuyers, with decent credit. The HomeReady program allows you to purchase a home with only a 3% down payment. If you combine the loan with an eligible down payment program you can purchase a home without any of your own money.

    Although the minimum credit score for a Fannie Mae loan is 620, many lenders require a higher score. Also, Fannie Mae offers discounts on the pricing and mortgage insurance requirements if your credit score is over 680.

    Read more >
  3. Freddie Mac's Home Possible Low Downpayment Mortgage

    The Home Possible is Freddie Mac’s Flagship Low down payment mortgage. It helps first-time low-to moderate-income homebuyers by offering a three-percent down payment. Your down payment can come from a variety of sources, including family, employee-assistance programs, secondary financing.

    The program's credit score requirement, 620, is similar to other conventional loans.  However, lenders often have stricter requirements.  The program has income and geographic limitations. Unless the property is in a low-income tract, the borrowers’ income cannot exceed, 100% of the county area median income (AMI). 

    Read more >
  4. Freddie Mac's HomeOne Low Downpayment Mortgage

     In order to expend the low down payment mortgage to a broader population, Freddie Mac introduced in 2018, the HomeOne Mortgage. The HomeOne Mortgage offers a low down payment, 3% or less in certain circumstances. The program, unlike the HomePossible Mortgage,  does not have income or geographical limitations. 

    The HomeOne mortgage is very similar to other conventional mortgage programs. The HomeOne mortgage has a standard credit score and history requirements. Although the required minimum credit score is 620, most lenders have stricter standards. It is always a good idea to shop around. Private Mortgage Insurance (PMI) is also required. If you have a high credit score, then your mortgage insurance payments might be less than an FHA loan. 

    Read more >
  5. USDA/RHS Low Down Payment Purchase Mortgage

    The United States Department of Agriculture / Rural Housing Service (USDA/RHS) mortgage is a unique government mortgage program that offers zero to low down payment mortgages. The rural mortgage program has specific geographic limitations and is limited to borrowers with low to very low income.

    There is a direct loan program for very low-income borrowers. This program offers subsidized rates, no mortgage insurance and a long payback period.

    The USDA/RHS guaranteed loan program for other low to middle-income borrowers requires mortgage insurance, but does allow for a zero down payment mortgage.

    Read more >

     
  6. VA Low Down Payment Mortgage

    VA loans are a unique type of low or no down payment purchase mortgage and restricted to certain veterans, who have a valid Certificate of Eligibility. The Government partially back VA loans and do not require mortgage insurance. However, there are funding fees, so ask your lender for all of the details about rates and closing costs.

    To be eligible for a VA loan, "You must have satisfactory credit, sufficient income, and a valid Certificate of Eligibility (COE) to be eligible for a VA-guaranteed home loan. The home must be for your own personal occupancy. The eligibility requirements to obtain a COE are listed below for Servicemembers and Veterans, spouses, and other eligible beneficiaries".

    The total amount available is tied to the Federal Housing Finance Agency's limits. According to the VA site, "the basic entitlement available to each eligible Veteran is $36,000. Lenders will generally loan up to 4 times a Veteran's available entitlement without a down payment, provided the Veteran is income and credit qualified and the property appraises for the asking price".

    Read more >
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2 Comments
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  • E
    Apr, 2019
    Edith

    I have about 5% saved to buy a home. My credit score is about 610, but is increasing because some of my bad items are getting old. I make my payments on time and I am paying off my credit card. My friends tell me to wait and save up more money. Also, they say that an FHA loan has lots of mortgage insurance costs. I don't know what to do. My oldest kid is going to start school next year and I really want a home of my own. What should I do?

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    • 35x35
      Apr, 2019
      Betsalel

      Hello Edith. That is fantastic that you are saving up money for a home AND also improving your credit score. It is always a tough decision between renting and buying a home. Are housing prices in your area going up? Is it a buyer's market or a seller's market? In the bottom line, buying a home is a long-term investment, and you never really know if it was the best time to buy. The bottom line is, can you afford to buy a home.

      As you could tell from the article, there are a lot of mortgage options available with a 5% down payment. However, with a 610 credit score, your options are limited. Even if you raise your score to 620, and qualify for a Fannie Mae or Freddie Mac low down payment mortgage, it is quite possible that you won't find a lender who qualifies you. (Did you check your debt-to-income ratio? Try the Bills.com DTI Calculator).

      While the FHA has higher upfront costs and the mortgage insurance is not canceled (unless you sell the house or refinance the mortgage), the nominal interest rate is often lower.

      My recommendation is that you start shopping for a mortgage and get pre-qualified. That way you can start looking for a home. When you are ready to close on a home, then you can see if our credit score improves and you can qualify for a mortgage with better terms. (Remember, mortgage rates are constantly changing).

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