Low- or No-Down-Payment Mortgage Options

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Updated on Tuesday, March 31, 2020

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It’s an often-cited rule of thumb, but you don’t actually need a 20% down payment to get a mortgage. In fact, you can get a home loan with little money down, and even a no-down-payment mortgage.

Assuming you’re financially prepared for all of the other responsibilities of homeownership, consider the following mortgage programs.

No-down-payment mortgage options

USDA loans

The U.S. Department of Agriculture (USDA) insures home loans made by approved lenders to eligible homebuyers in designated rural areas. As the program states, USDA loans were created to improve the quality of life in rural areas by giving families the opportunity to own a “modest, decent, safe and sanitary” home as their primary residence.

There’s no required minimum down payment or mortgage insurance, but there are guarantee fees. A portion of the fee is paid upfront and is 1% of the loan amount; the other portion is 0.35% of the loan amount and is paid annually.

To be eligible, you must:

  • Have a low-to-moderate income for your area
  • Buy a home in a designated rural area
  • Have a preferred minimum 640 credit score
  • Have a maximum 41% debt-to-income (DTI) ratio

VA loans

The U.S. Department of Veterans Affairs (VA) also offers a no-down-payment mortgage option guaranteed through its VA loan program. These loans cater to active-duty military service members, veterans and eligible spouses, and are offered by private lenders.

Borrowers aren’t required to make a down payment, but there is an upfront funding fee — which ranges from 1.4% to 3.6% of the loan amount — to help offset the program’s costs to taxpayers. The loan must be used to purchase a primary residence.

To be eligible, you must:

  • Have a certificate of eligibility from the VA
  • Have a preferred minimum 620 credit score
  • Show proof of stable income
  • Have a maximum 41% DTI ratio

Low-down-payment mortgage options

Fannie Mae HomeReady® and Standard 97% LTV

Fannie Mae has two low down payment conventional loans: HomeReady® and Standard 97% LTV. The HomeReady® mortgage program is open to both first-time and repeat homebuyers, while the Standard option requires at least one borrower to be a first-time buyer.

Borrowers can’t earn more than 80% of their area median income (AMI) if applying for a HomeReady loan. Additionally, if all borrowers on either a HomeReady or Standard loan are first-timers, at least one of them must complete an online homebuyer education course.

Both programs also require private mortgage insurance (PMI) if you make a down payment of less than 20%, though PMI can be removed after you reach 20% equity.

To be eligible, you must:

  • Have a 620 credit score
  • Have a 3% minimum down payment
  • Have a maximum 50% DTI ratio

Freddie Mac HomeOne and Home Possible

Freddie Mac’s HomeOne mortgage is reserved for first-time homebuyers and doesn’t include any income restrictions. The Home Possible® loan is an option for first-time and repeat buyers with a low to moderate income.

Your income must not exceed 80% of the AMI for a Home Possible® loan. You may qualify without a credit score, but your minimum down payment rises from 3% to 5%. Cancellable PMI is required for borrowers who put down less than 20%.

There’s a homebuyer education requirement for both HomeOne and Home Possible® programs when all borrowers on the loan are first-timers.

To be eligible, you must:

  • Have a 3% minimum down payment
  • Have a minimum 660 credit score
  • Have a maximum 50% DTI ratio

FHA loans

The Federal Housing Administration’s (FHA) low down payment home loans require just a 3.5% contribution and a 580 credit score. You can also qualify for an FHA loan with a credit score of 500 to 579 if you have at least a 10% down payment. Other FHA loans, such as construction-to-permanent loans and 203(k) loans, have the same credit score and down payment requirements.

FHA loans require upfront and annual mortgage insurance premiums (MIP). The upfront premium is 1.75% of the loan amount; the annual premium ranges from 0.45% to 1.05%, is divided by 12 and paid in monthly installments as an addition to your mortgage payment. Borrowers who put down at least 10% only pay mortgage insurance for 11 years; putting down less means you’ll pay MIP for the life of your loan.

To be eligible, you must:

  • Have a 580 credit score and 3.5% down payment
  • Have a 500 to 579 credit score and 10% down payment
  • Borrow within your county’s FHA loan limits
  • Have a maximum 43% DTI ratio

Good Neighbor Next Door

The Good Neighbor Next Door program from the U.S. Department of Housing and Urban Development (HUD) allows homebuyers in certain public service professions to buy a home at a 50% discount. If you qualify for and use an FHA loan to buy a home, the down payment is only $100, instead of the minimum 3.5% that’s usually required.

Eligible borrowers must buy a home located in a HUD revitalization area and commit to live in the home for at least three years. They must also sign a silent second mortgage for the discounted amount, though no payments are required if all program requirements are met.

To be eligible, you must:

  • Be a full-time pre-K through 12th grade educator, emergency medical technician, firefighter or law enforcement officer
  • Buy a home in a HUD revitalization area
  • Qualify for a conventional, FHA or VA loan
  • Live in the home for at least three years

Pros and cons of no or low down payment

Pros

Cons

  • Buy a home sooner. It can take years to save up for a larger down payment. By contributing 0% down or the lowest possible amount, you can reach your homeownership goal in less time.

  • Avoid depleting your savings. If you limit how much money you contribute to your home purchase, you can leave some of your emergency savings intact. Lenders want to know that you can weather financial hiccups, such as a job loss or income reduction.

  • Start out with less equity. The less money you put down, the less home equity you’ll have initially. This means your ownership stake in your home is much smaller, which may lead to pocketing less money if you need to sell in a few years.

  • Take out a larger mortgage. A no- or low-down-payment mortgage means you’ll be close to financing 100% of your home’s purchase price. A larger mortgage means a higher monthly payment amount.

  • Pay more in interest over time. The more money you borrow, the higher your interest rate typically will be. This also means you’ll pay more in interest over the life of your loan.

FAQs about mortgage down payments

Yes, there will be closing costs to pay on your home loan. Mortgage closing costs can range from 2% to 6% of your loan amount. You can pay these costs out of pocket at the closing table, or ask your lender about a no-closing-cost mortgage. With this type of loan, your lender will either increase your mortgage rate or add the closing costs to your loan amount, instead of having you pay those costs upfront.

It depends on the type of mortgage. Conventional loans require private mortgage insurance when you put down less than 20%, and it can be canceled after you’ve built at least 20% equity in your home. All FHA loans require mortgage insurance premiums, but if you put down 10% or more, you can get rid of MIP after 11 years.

Reach out to your loan officer and real estate agent for help identifying any down payment assistance programs you might qualify for. You should also check with your state’s housing finance agency.

Many loan programs let you use monetary gifts from family members, friends and others to help cover your down payment, but there must be a specific paper trail for the gift. The donor will need to submit a gift letter to show that you won’t have to repay the money being gifted to you. Consult your lender for specific guidelines.

Yes, your down payment amount can affect your mortgage rate. The less money you put down, the riskier you can appear to lenders, and they can account for this risk by raising your mortgage rate.