Low down payment mortgage options

Many home buyers believe they need a 20% downpayment to buy a home. This misconception could stop buyers before they start, and cost them years of building wealth and home equity through homeownership.

A recent survey by Wells Fargo found that 44 percent of U.S adults believed lenders require 20 percent down to buy a home.

Yet all major loan types available today allow for a downpayment of less than 5 percent.

Homebuyers are surprised to learn that these mortgage programs exist and that they are probably eligible for at least one of them.

These loans require little or no down payment

There are four major types of mortgages and none of them require 20% down or even close to it. Nearly all home buyers in today’s market opt for VA, USDA, FHA, or conventional financing. These are widely available programs available at virtually every lender.

If you are considering buying a home with little or no downpayment, you are not alone. The number of homeowners who purchased homes with low downpayment loans have been steadily increasing for the past five years according to the Wall Street Journal.

In 2019, according to Porch.com, over half of Millenial and Gen X home buyers made a down payment of less than 10% when buying their homes. Even 19% of boomers made down payments of less than 10%.

The uptick is due in large part to a reduction in the cost of mortgages offered by the Federal Housing Administration (FHA), which can approve loans to borrowers with less-than-perfect credit.

Mortgage rates are low and low- and no-downpayment mortgages are available from mortgage lenders in your city or town. Often, new homebuyers who contact a mortgage company to find out their options walk out with a pre-approval letter. They can then take this letter and make a serious offer on a home, years sooner than they first believed they could.

Today’s mortgage market offers an array of easy-to-access programs that are suited for home buyers from almost every background and economic standing.

FHA loan: 3.5% down payment

The FHA loan allows a downpayment of just 3.5 percent. The Federal Housing Administration (FHA) administers the program and insures lenders who issue the loans. This keeps FHA loan rates some of the lowest of any loan type.

FHA loans are common among first-time home buyers. The purpose of this loan since its creation in 1934 has been to facilitate homeownership for those who would not qualify for other loan programs. The FHA has a minimum credit score of 580, which means borrowers with lower credit scores can qualify. FHA mortgage approval standards are considered to be the most friendly toward first-time buyers.

Conventional 97 loan: 3% down payment

The Conventional 97 is a 3% downpayment program available to home buyers with higher credit scores than FHA requires. Conventional mortgages are ones that lenders can sell to Freddie Mac or Fannie Mae after closing.

The advantage with this program is the cancellable private mortgage insurance (PMI). FHA loans require mortgage insurance payments for the life of the loan in most cases.

Conventional loans, including the Conventional 97, allow you to remove the mortgage insurance when you reach 20% equity. This loan could work for home buyers who plan to pay down their principal balance quickly to eliminate the extra cost of PMI.

HomeReady loan: 3% down payment

The HomeReady™ mortgage is another type of conventional 3% downpayment program. HomeReady™ was designed to help multi-generational households get approved for mortgage financing. Backed by Fannie Mae and available from nearly every U.S. lender, the HomeReady™ mortgage offers below-market mortgage insurance costs and the most innovative underwriting idea in more than a decade.

Borrowers can use many non-traditional income types to help them qualify, including rental income from a mother-in-law unit, roommate income, and even income from a non-borrowing household member.

This program will open up homeownership possibilities to a wider array of families.

VA loan: 0% down payment

The U.S. Department of Veterans Affairs (VA) insures VA loans, allowing lenders to approve loans at zero down payment. The program is available to current and former members of the U.S. military and surviving spouses.

VA mortgage rates are the lowest of any low- and no-downpayment mortgage loans. For qualifying borrowers, it’s about the best mortgage product on the market. Eligible veterans never pay mortgage insurance, further improving the affordability of homeownership.

In general, active duty and honorably discharged service personnel are eligible for the VA program. In addition, home buyers who have spent at least 6 years in the Reserves or National Guard are eligible, as are spouses of servicemembers killed in the line of duty.

USDA loan: 0% down payment

USDA home loans offer zero down payment and low rates to buyers in less dense suburban and rural areas. These loans are backed by the U.S. Department of Agriculture.

The program was created to spur homeownership and economic activity outside of major urban areas. As such, homeowners must make less than 115% of the median income for the area. These income limits are quite generous. In some locales, upper-middle-class families will fall within acceptable limits.

USDA loans are one of the most affordable loan types. USDA interest rates are lower than those of conventional loans. Monthly payments are extremely affordable.

The USDA loan program was intended to make homeownership more accessible so it can only be used to purchase a primary residence.

This program is a powerful loan option for suburban renters hoping to break into the housing market.

Check your eligibility for a low-down payment loan

Mortgage rates are low, including those for low-down payment loan types. Making little or no downpayment on a home does not necessarily mean paying higher interest rates.

There’s no obligation once you check your eligibility for one of these programs. The lender will tell you if you qualify, and if you feel it’s not the right time to buy, you do not have to proceed.