Low-Down-Payment Mortgages | U.S. News

Saving a 20% down payment to get a mortgage is daunting — and it’s a myth that you need this much cash to buy a home. A range of low-down-payment mortgages and down payment assistance programs can unlock homeownership for people who lack substantial savings but can afford monthly house payments.

Here’s how you can buy a home with a low down payment that fits your needs. What you’ll learn here:

A low-down-payment mortgage is one that requires a down payment – the portion of your home’s purchase price you pay upfront – of less than 20%.

“Many borrowers with limited resources find these mortgages attractive because it allows them to save their remaining assets for incidentals and other unexpected expenses,” says Julienne Joseph, assistant director of government housing programs, Mortgage Bankers Association.

Down payment requirements for conventional loans typically range from 3% to 5%, sometimes up to 15%, depending on your bank and your credit. Government loan programs can go as low as 0% and up to 3.5%, although you may need to meet credit and income criteria and live in certain areas.

“We have to get over the fallacy that people need 20% down to buy a home,” says Bill Banfield, executive vice president of capital markets, Quicken Loans.

Is a low-down-payment mortgage right for you? You might decide to apply for a loan with a down payment of less than 20% for many reasons.

Consider these pros and cons:

With a low down payment, you can get into a home faster than waiting to save for a large down payment. Speed could help you take advantage of historically low interest rates .

“(A low down payment) provides the ability for people to buy a home and begin establishing wealth by owning an asset and paying down that debt,” Banfield says.

First-time homebuyers often choose low-down-payment mortgages because they do not have equity in a home to put toward a purchase. Also, you can preserve some of your savings for other costs or simply maintain a cash reserve for emergencies.

But there are drawbacks: Putting less money down means your monthly mortgage payments will be higher, and you will likely pay private mortgage insurance on top of that.

“Keep in mind, when you get into a home for a low down payment, you’ll have little to no equity, so there are no funds to tap into for a cash-out refinance or home equity line of credit,” says Stephanie Hawley, senior loan officer at Flagstar Bank.

These options are generally available once a homeowner has 15% to 20% equity. “Be prepared that it might take you five to seven years before you can tap into those options,” Hawley says.

Also, buyers need to plan for expenses other than the down payment, including closing costs, inspections and an appraisal. “Someone with only 3% to put down might need to look at 0% down or down payment assistance because they’ll need to use that savings elsewhere to close on the home,” Hawley says.

The most important factor to qualify for any mortgage, including one with a low down payment, is a solid credit report.

“Take a look at your credit report before meeting with lenders, and be sure you are paying bills on time,” Banfield says. “If you can pay down balances, do that. And definitely do not open up new accounts, especially when you are in the homebuying process.”

Your FICO score can determine the cost of your mortgage and drive mortgage insurance prices up or down. For example, conventional low-down-payment mortgages are generally for borrowers with a 620 credit score or higher, says David Battany, executive vice president of capital markets, Guild Mortgage.

The Federal Housing Administration’s 3.5% down mortgage is available to buyers with a 580 credit score. If your credit score is below 580, you’ll probably need to put down 10% to get a mortgage, Banfield says.

However, some banks offer local programs for low- to moderate-income buyers who might be eligible for funds to assist with a down payment, closing costs or both expenses.

Be sure any money you will use toward a down payment and closing costs is in one bank account, especially if you plan to pull funds from investments, savings or other sources, such as gift money. “Have all of that in one account so it can be documented and is easy for someone who is not you to understand where the money will come from,” Banfield says.

If you’re having a tough time saving for a down payment and 20% down seems out of reach, you’re not alone — and there’s good news. You could qualify for several low-down-payment mortgage programs, depending on credit history, household income and neighborhood.

FHA Loan
The Federal Housing Administration offers a low-down-payment mortgage that allows you to put as little as 3.5% down. Borrowers can qualify with credit score requirements that are more lenient than conventional low-down-payment loans.

Your FICO score must be at least 580 to make a 3.5% down payment. For scores between 500 and 579, you’ll need a 10% down payment.

Your debt-to-income ratio – how much you owe each month compared with how much you earn – should be less than 43%, and you must provide proof of employment and steady income. However, keep in mind that these are the FHA’s standards, and lenders may impose more strict requirements.

U.S. Department of Agriculture Loan
The USDA’s Single Family Housing Guaranteed Loan Program is available for certain rural areas. Borrowers do not have to meet credit score requirements but must show an ability to manage debt and pay bills. No down payment is required, but you’ll pay an upfront guarantee fee and an annual fee.

VA Loan
The Department of Veterans Affairs, or VA, offers a zero-down-payment mortgage for qualifying veterans and spouses. A funding fee is charged at closing, which can be financed, Banfield says. Veterans who want to apply must furnish a Certificate of Eligibility, or COE.

HomeReady by Fannie Mae
Fannie Mae offers a 3% down payment loan for low- to middle-income homebuyers. Your credit score must be at least 620 to get a HomeReady loan, and if it is 680 or higher, you could get better pricing. Credit guidelines are tougher for this loan compared with the FHA loan.

Conventional 97
This Fannie Mae loan requires a 3% down payment but sets no income limits, as with the HomeReady loan. Buyers need a credit score of 620 or higher for this conventional loan.

Freddie Mac Home Possible Mortgage
This fixed-rate loan has a down payment as low as 3% and lower-cost mortgage insurance than FHA loans. The Freddie Mac Home Possible loan is available for those with credit scores of 620 or higher.

Fannie Mae HomePath Ready Buyer Loans
Fannie Mae offers a program for first-time homebuyers who want to purchase an REO property – a home owned by a lender or mortgage investor. You can put as little as 3% down and get up to 3% of the purchase price back as closing cost assistance for HomePath properties.

Low-Down-Payment Bank Loans
Lenders may offer their own low-down-payment mortgages and down payment assistance programs that help homebuyers get into a loan without a 20% down payment.

“Talk to a local lender who is a licensed professional and can share knowledge about the offerings in your area,” says Ann Thompson, retail sales executive-West, consumer lending, Bank of America. “Meet with lending specialists at more than one bank, and ask about programs because they vary.”

Some employers offer down payment assistance, Thompson says. State, county and municipal grant and loan programs may also be available to help you afford a mortgage down payment.