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Some home buyers have $20,000 – $30,000 or more in the bank and could easily make a down payment on a new home.
But for many, saving money for your mortgage down payment may take a while. And while you’re busy saving money, house prices will probably increase, which creates this common question: Can I buy a house with no down payment or at least a low down payment?
Can you do this? Should you? Let’s weigh the pros & cons of a low- or no-down-payment mortgage.
IN THIS ARTICLE:
- No Down Payment Mortgages
- Low Down Payment Mortgages
- Should You Get a Low Down Payment Mortgage?
- Down Payment vs. Closing Costs
- Best Low Down Payment Mortgage Lenders
No Down Payment Mortgages
If you’re ready for homeownership in every way, except having the down payment, you don’t always have to wait. It’s possible for some shoppers to buy a house with no money down.
The two leading no down payment mortgage programs are USDA & VA Home Loans.
The U.S. Department of Agriculture, which issues mortgages for homebuyers in rural areas, offers a zero down payment option for qualified buyers.
USDA lends money only in rural areas, but you may be surprised how much of the country the department considers rural.
If you live in a city of 50,000 or less, chances are you’d meet this “rural” qualification. By this definition, many suburbs near large cities would be defined as rural.
The USDA has income qualifications, too. If your household earns more than 115 percent of your area’s median household income, you probably won’t qualify for this kind of mortgage.
USDA prefers borrowers have a 640 or higher credit score, and the home must be your primary residence and not a vacation home or rental.
If you can qualify, you could be in a new home with no down payment.
USDA Loan Pros:
- No down payment required
- Accessible for many borrowers
USDA Loan Cons:
- PMI is not cancellable
- Credit score requirement higher than FHA
A qualifying veteran can get a mortgage with no down payment.
The Department of Veterans Affairs insures loans to veterans, so your bank will not need to charge you for PMI either. It’s a great perk that active duty, reserve, and retired military members have earned.
VA loans do require a set-up fee, which can range from 2.15 to 3.3 percent, paid upfront. However, borrowers can fold this fee into the loan if necessary.
VA Loan Pros:
- No down payment required
- No PMI payments required
VA Loan Cons:
- Available only for veterans
- Set-up fee can add to debt if you finance it
Low Down Payment Mortgages
Many home shoppers think they need to put 20 percent down — or at least 10 percent down — on a new mortgage. While you would definitely benefit from putting this much money down, it’s not always required.
Instead, you can consider these low down payment mortgage programs:
FHA Loans (3.5%)
The Federal Housing Authority is not a lender. Instead, the agency is a guarantor of mortgage loans.
When the FHA has your back, your lender can afford to give you more generous terms, such as requiring a lower down payment.
You could put down as little as 3.5 percent with an FHA-backed loan. On a $200,000 house, this would equal $7,000.
FHA loans can also help home buyers with lower credit scores — even in the 580 range — get into an affordable loan.
FHA Loan Pros
- Buyers can put as little as 3.5 percent down
- Buyers with lower credit scores can qualify
FHA Loan Cons
- The buyer pays 1.75 percent upfront for Private Mortgage Insurance (PMI).
- Buyer pays PMI premiums for the duration of the loan
- Can’t be used for an investment property
HomeReady Mortgage Program (3%)
Fannie Mae, the federally backed mortgage loan buyer, makes low down payment mortgages possible through the HomeReady program.
Buyers can put as little as 3 percent down. This low down payment mortgage program is open to first-time and repeat home buyers who live in lower income Census tracts.
Unlike with an FHA loan, you can cancel your HomeReady loan’s PMI after you’ve paid your loan down by 20 percent, saving thousands of dollars over the life of your loan.
You’ll also need a better credit score — typically 620 at least — to qualify.
But if you do not have any established credit, underwriters can analyze your other bills, including utility bills and even some subscriptions to measure your creditworthiness.
- Cancellable PMI
- Buyers can put as little as 3% down
- Underwriters consider the income of all home occupants
- Higher incomes won’t qualify
- Not available for second homes or investment properties
- Only available for a 30-year fixed-rate mortgage
- Borrower’s financial counseling course required.
Conventional 97 Program (3%)
Homebuyers in any income bracket or geographical region can qualify for a Conventional 97 loan and put only 3 percent down on the mortgage.
Fannie Mae backs these loans which resemble the agency’s HomeReady program but without the income restrictions.
Applicants would need at least a 620 credit score, and 680 or higher usually unlocks better interest rates.
Conventional 97 Pros
- Cancellable PMI
- Open to first-time or repeat homebuyers
- As little as 3 percent down
- No financial counseling required
Conventional 97 Cons
- Not available for second homes or investment properties
- Available only for a 30-year fixed-rate mortgage
- Loan limit of $510,400 even in high-value markets
Conventional Loan With PMI (3%)
If you have excellent credit — in the 700s, for example — but not much cash to spare for a down payment, you may still qualify for a conventional, non-subsidized mortgage with a low down payment.
This method will require you to pay for Private Mortgage Insurance, which may cost up to 1 percent of your loan’s balance each year.
What does that mean in real life? Here’s an example:
Let’s say you’re looking at a $200,000 home. You have $6,000 to put down, which amounts to 3 percent. You’d owe $194,000 on the mortgage.
Paying the extra 1 percent in PMI would add almost $2,000 to your annual house payments or about $166 a month.
Once you get the mortgage paid down to 80 percent of its original value, you can cancel your PMI, which will lower your monthly house payment.
Conventional Loan Pros
- Cancellable PMI
- No government restrictions on how you use the property
- Easier closing with less red tape
Conventional Loan Cons
- Difficult to qualify with less-than-excellent credit
Home Possible Advantage (3%)
Freddie Mac launched the Home Possible Advantage program, which offers qualified low to moderate-income homebuyers a conventional mortgage with a maximum loan-to-value ratio of 97 percent.
This program is available for 15, 20, and 30-year fixed-rate mortgages and can be used to buy a single unit property or to refinance an existing mortgage.
First-time homebuyers are required to participate in a borrower education program to qualify.
Home Possible Advantage Pros
- Cancellable PMI
- Available in 15, 20, & 30-year fixed-rate mortgages
Home Possible Advantage Cons
- A required credit score of 660
- Income can’t exceed the median income in your area
- Borrower education required for first-time homebuyers
Piggybacking to Avoid PMI (10%)
Private Mortgage Insurance can add a couple hundred dollars a month to your mortgage payment, and the insurance does not protect your investment. It protects your lender’s investment.
So everybody wants to avoid PMI when possible. You can avoid PMI completely by:
- Paying 20 Percent Down: When you finance 80 percent of your home’s value or less, your lender is taking less of a risk on a default, which means you don’t need PMI.
- Getting a VA Loan: We’ll get into this in the No Down Payment Mortgages section below, but several lending programs for veterans do not require PMI.
- Piggybacking Multiple Loans: By using more than one loan, you could avoid PMI.
Here’s how piggybacking would work:
- Get a primary mortgage to cover 80 percent of your home purchase.
- Next, you’d get a second mortgage to cover 10 percent of the home.
- Bring 10 percent of your own money as a down payment.
This method lets you put down only 10 percent while still avoiding PMI because your primary mortgage covers only 80 percent of your home’s purchase price.
Essentially, you’d be using a second mortgage to double your 10 percent cash down payment, avoiding the PMI payments. It’s a pretty elegant solution if you have the 10 percent to put down.
Other Low Down Payment Mortgage Programs
If you don’t like any of the above options for low down payment mortgages, here are a few other options to ask your lender or Realtor about:
Should You Get a Low Down Payment Mortgage?
We’ve checked out some great tools for getting a mortgage with no down payment or with a low down payment.
We haven’t discussed whether it’s a good idea to buy a house this way, and this topic deserves a little attention.
We all have different needs and challenges in our financial lives. But for most of us, putting money down on a home is a really good idea.
Here are four reasons why:
1. Down Payments Show You’re Serious
Your willingness and ability to put down thousands of dollars of your own money tells your lender, the seller, and the Realtors that you’re serious about buying the home.
Someone with cash in hand always seems like a more serious buyer.
2. Putting Money Down Gives You More Control
It’s not all about showing off. A bigger down payment can help you qualify for better loan terms by giving you more loan choices.
Having more choices means you have more control over the shopping process. You aren’t depending on one type of loan to come through for you.
3. Down Payments Control Your Debt
Putting 10 percent down means you own 10 percent of the house on Day 1. You’re going into debt for only 90 percent of the home’s purchase price.
Let’s say the real estate market in your region decreases by 2 percent temporarily. Not a big deal — the market will correct itself if you’re patient.
But what if this happens right when you need to sell the home because your partner got a job in another town? You could owe more than the house is worth if you financed 100 percent rather than putting some money down.
4. Down Payments Help Avoid PMI
PMI stands for Private Mortgage Insurance. We’ve already talked a lot about PMI in this post, but the topic will come up again and again in discussions about down payments.
Since PMI does not protect your investment (it protects your lender’s money), most of us will want to avoid paying these premiums.
Paying at least 20 percent down prevents you from paying PMI premiums.
Down Payment vs. Closing Costs: What’s the Difference?
Your home down payment applies directly to the purchase of your home and lowers the amount you’ll need to borrow.
Separately from your down payment, you’ll also have to consider your closing costs when you buy a home.
Closing costs are fees — legal fees, lending fees, Realtor’s fees, for example — required to make your home purchase happen. Sometimes you can share this expense with the seller, especially in a buyer’s market — but you can’t usually count on this arrangement.
Typical closing fees include:
You should always get your home inspected before buying it. That way, you can get problems fixed — or decide to buy another home — before finalizing your mortgage. A good home inspection costs several hundred dollars.
Your closing attorney will need to make sure no one else can claim ownership of the home you’re buying. A title search, and title insurance to fix problems later, if necessary, can exceed $1,000.
Most lenders charge a loan origination fee of about 1 percent of the loan. For a $200,000 house, this would cost $2,000.
Your loan officers will want to make sure the home you’re buying is worth the money they’re lending. An appraisal or assessment will cost a couple hundred dollars.
What If I Can’t Afford Closing Costs?
You can expect to pay around $5,000 for closing costs on a $200,000 home.
If you can’t afford closing costs, you’ll need to plan ahead to address this problem.
Here are 3 ways to avoid closing costs:
- Finance the Costs
It’s not unusual for a buyer to fold the closing costs into the loan itself. But this is not an ideal solution since you’d be adding more long-term debt in excess of your home’s value.
- Negotiate with the Seller
Maybe you can convince the seller to help with closing costs. As you negotiate a purchase price for the property, be up front about this need.
- Use a Separate Loan
An unsecured convenience loan from your bank or credit union could help you pay these costs. You’re still borrowing money, but at least you could pay back the loan within a couple years instead of several decades.
Should I Pay Closing Costs or a Down Payment?
What if you have to choose between paying closing costs or paying a down payment? I’d be inclined to spend cash on the down payment and make other arrangements for the closing costs.
Consider these important factors:
How Are Rates Affected?
If a down payment gives you access to lower interest rates, the lower rate can save you tens of thousands of dollars over the next 30 years. Use your cash for the down payment.
What Does Your Loan Require?
A HomeReady Loan, for example, requires 3 percent down. Obviously you’d need to use your cash to meet this requirement and make some other arrangements for closing costs.
Is it a Buyer’s Market?
If homes aren’t selling in your area, you have more negotiating power as a buyer. You may be able to get the seller to pay most or all closing costs.
Paying closing costs is kind of like buying a ticket into the game of homeownership. Your down payment is the game itself. When possible, lean toward making a bigger down payment.
Who Is The Best Low Down Payment Mortgage Lender?
With so many mortgage lenders out there, you have lots of choices.
Not all lenders have the authority to issue FHA, USDA, or VA loans. If you need to buy a home with zero down or a low down payment, make sure your lender can work with these types of home loans.
Here are some of the best lenders that offer low or no down payment mortgages:
Top 3 FHA Lenders
Top 3 USDA Lenders
Top 3 VA Lenders
|New American Funding||Guaranteed Rate||Rocket Mortgage|
A loan aggregator such as Lending Tree can help you shop for the best rates. But, again, make sure the lender you like can provide the loan you need before applying.
A lender should:
- Be Upfront About Fees: You don’t want to be surprised about high fees when sitting at the closing table.
- Be Accessible: Whether you’re using an online-only lender or a traditional in-person loan officer, make sure you can ask questions and get clarifications as needed.
- Have Competitive Rates: Your loan’s interest rate will directly impact your mortgage payment and the total amount you’ll pay over the life of your loan. Your credit score will influence your rates, too.
- Offer Pre Approval: A loan pre-approval doesn’t guarantee you’ll get the money you’ll need, but this process can help you learn how much you could borrow. This helps as you shop for homes.
What Is My Price Range for a New Home?
Your loan pre approval can help show you how much your lender would let you borrow. Be careful, your pre approval may exceed the amount you can actually afford.
Most advisors recommend paying no more than a third of your income on housing. If you make $110,000 a year, $3,000 a month would be your maximum house payment. You can use a mortgage calculator to find how much you’d pay each month on the home you’re considering. Be sure to subtract your down payment from the cost of the home.
Most mortgage calculators show only your loan payments. They do not reflect added costs, such as your home insurance premiums or your local property tax payments. If you need PMI, these premiums will also be charged through your mortgage lender.
And keep in mind the 30 percent rule doesn’t apply directly to everyone. It’s just general advice. If you have few other debts and have a low cost of living, maybe you can afford more each month in housing costs. If you’re already struggling with debt, consider working toward a lower-than-30-percent house payment.
Is PMI Really That Bad?
Nobody wants to pay for something they’ll never use, right?
PMI fits this description perfectly: Not only will we never use it, we’re buying it for someone else to use in case we can’t make our house payments. That’s just not cool.
But if you can’t buy your house without PMI, this added expense could be worthwhile. Especially with a loan whose PMI can be cancelled once you pay it down to 80 percent of the original loan.
Currently, FHA and USDA loans require these premiums throughout the life of your loan.
What About Gifted Money as a Down Payment?
During your loan underwriting process, which will take place before you close the sale, your lender will ask for a few month’s worth of your personal bank statements.
If your $20,000 down payment appeared in your bank last month, for example, underwriters will have some questions. Where did the money come from? Did you borrow it from someone else who can make a claim on the home? If the money came from a gift, can the donor reclaim the money next month?
Using gifted or inherited money as a down payment is definitely possible. But you should be up front with your lender to make sure you avoid unnecessary delays later. Some lenders may require the donor to sign paperwork ensuring your ownership of the funds.
Should I Work with a Real Estate Agent?
Home buyers never have to work with a real estate agent. After all, an agent’s commission comes out of your (and/or the seller’s) pocket, and you get to decide how to spend your money.
But a Realtor can usually earn his or her commission by helping you find the right house and guiding you through the process of closing on your home.
Realtors also have knowledge about local grants and incentives, which can help you lower your down payment needs.
Ultimately this has to be your decision, but I will point this out: If the seller has an agent and you don’t, the seller’s agent will claim all of the commission and will have no obligation to help you.
When you have an agent on your side, your agent will split the commission with the seller’s agent. So either way, you’re paying the same commission. You may as well get something for your money by bringing in your own agent.
Does A Zero Down Mortgage Make Sense For You?
Ideally, you’d be able to put 20 percent or more down on your home. But ideals and reality don’t always match.
Even if you can’t afford a down payment, look into a USDA loan, a Conventional 97, a HomeReady loan, or an FHA-backed loan.
You’ll pay more in fees, and you may need more years to pay off your home with zero down or a lower down payment.
Even so, every month, your housing money would be working to build your financial freedom rather than padding your landlord’s bottom line.