Busting the myth: You don’t need a 20 percent down payment
You can buy a house for less than 20 percent down
- FHA loans offer down payments as low as 3.5 percent.
- Freddie Mac Home Possible and Fannie Mae HomeReady mortgages go as low as 3 percent down.
- VA and USDA loans offer zero-down mortgages to eligible homebuyers.
- Down payment assistance helps homebuyers get a house without putting down their own money.
It sounds like good advice: You always need to pay 20 percent of a home’s selling price as a down payment. But here’s the thing: That so-called conventional wisdom is actually a myth. You can buy a house with much less than 20 percent down.
So, just how much cash do you really need to buy a house?
1 percent down mortgages
Some lenders offer 1 percent down mortgages. These are technically 3 percent down mortgages; the borrower brings 1 percent of the down payment, and the lender covers the other 2 percent in the form of a grant to the borrower.
Many of these 1 percent down programs were funded through the Freddie Mac Home Possible program. As of November 2017, however, Freddie Mac no longer allows Home Possible lenders to provide any portion of the down payment as a grant; the borrower is responsible for the entire 3 percent. Although this has left the 1 percent down mortgage something of an endangered species, some lenders have continued their 1 percent down programs without the assistance of Freddie Mac.
Down payment assistance programs offer an alternative to the 1 percent down payment mortgage. Many states and municipalities offer grants that homebuyers can use in conjunction with a low down payment mortgage. Most programs require borrowers to attend a first-time homebuyer class.
Low down payment mortgages
Numerous programs exist to purchase a house with down payments ranging from 3 percent to 10 percent.
- FHA Loans. Loans insured by the Federal Housing Administration (FHA) allow borrowers to purchase a home for as little as 3.5 percent. FHA loans also feature less stringent eligibility requirements. You may qualify for an FHA loan with a credit score as low as 550, possibly even lower if you increase your down payment to 10 percent.
- Freddie Mac Home Possible. Freddie Mac’s Home Possible program offers mortgages with down payments between 3 percent and 5 percent. The program is available to both previous homebuyers and first-time homebuyers.
- Fannie Mae HomeReady Mortgage. Fannie Mae’s HomeReady mortgage program is designed for low- to moderate-income borrowers, and accepts down payments of as little as 3 percent.
No money down mortgages
If you want to buy a house with no money down, you have two options: Loans from the U.S. Department of Veterans Affairs (VA) or the U.S. Department of Agriculture (USDA). Many jurisdictions also have down payment assistance programs that, in conjunction with low-down payment options like FHA loans, can help homebuyers get into a house without a down payment.
- VA loans. VA loans are available to active-duty service members, veterans and reservists, and their spouses. The VA offers a zero-down mortgage program for eligible borrowers, and unlike most other loan options, zero-down VA loans don’t require the borrower to purchase mortgage insurance. Note that VA borrowers must pay a funding fee, which can be rolled into the mortgage.
- USDA loans. USDA loans are designed to encourage homeownership in rural areas. USDA loans are therefore only available in designated rural areas, although often the term “rural” is used rather loosely. The USDA maintains a map you can use to look up whether a property is eligible for a USDA loan. There are also income restrictions for USDA loans that vary by region.
- Down payment assistance. Many local jurisdictions offer down payment assistance programs. These programs help borrowers make a down payment, usually in the form of an interest-free loan that doesn’t have to be repaid until the home is sold or the borrower moves out of the home, although exact requirements vary.
Avoiding mortgage insurance
Now that you know you don’t need a 20 percent down payment to purchase a house, you may be ready to go out and buy one with a 3.5 percent FHA loan, or a zero-down USDA loan. But don’t run out just yet. There’s still a compelling reason to consider saving up a 20 percent down payment — namely, to avoid having to pay mortgage insurance.
For low- or no-down-payment loans, lenders require borrowers to pay for mortgage insurance. Unlike homeowner’s insurance, which protects borrowers in case something happens to their home, mortgage insurance protects the lenders in case the borrower defaults on the loan.
If you take out an FHA loan, you’ll be required to take out what’s called a Mortgage Insurance Premium, or MIP. Unless you’re making a 10 percent or greater down payment, MIP must be paid for the life of the loan, though you may be able to refinance the loan to remove the mortgage insurance.
USDA loans require mortgage insurance, but in the form of an upfront premium that costs less than the MIP for FHA loans. The only no-down-payment option that doesn’t require any kind of mortgage insurance is a VA loan.
If you’re taking out a Fannie or Freddie loan, however, you’ll take out what’s called Private Mortgage Insurance, or PMI. Unlike MIP, PMI can be cancelled after you’ve established 20 percent equity in your home.
Mortgage insurance is often rolled into the mortgage. It represents a significant cost, however, and saving up a 20 percent down payment and eliminating the need for mortgage insurance can make your monthly payment more affordable or help you afford a more expensive home.
If you can’t wait to save the money, one option to avoid mortgage insurance is take out a piggyback loan. A piggyback loan is a second mortgage taken to help you make a 20 percent down payment to avoid paying PMI. The borrower typically must come up with a 10 percent down payment; the piggyback loan is taken out for the other 10 percent, for a total of 20 percent. Piggyback loans add a layer of complexity to a home purchase, so if you decide to take one out, make sure you work with an experienced lender.