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If you assume you need to scrape together a 20% down payment to buy a home, you're not alone. In 1989, that was the median down payment, according to the National Association of Realtors. But times have changed, and the median down payment in 2019 was actually 12% of the home's sale price (half that for first-time homebuyers), according to the association.
Certain government-backed and private loans permit lower down payments for eligible borrowers. The trade-off is often a requirement that the borrower pays mortgage insurance, and a higher interest rate. If you can't afford to put 20% down, or you have a better idea of what to do with that money, these loans could make homebuying a reality.
Loans That Require No Down Payments
Nearly all mortgages require at least some money down, but there are two exceptions:
Eligible veterans, service members and surviving family members can utilize VA loans, which are partially guaranteed by the U.S. Department of Veterans Affairs. They're offered via private lenders, but this type of government-backed loan typically requires no down payment, and offers lower closing costs and interest rates than conventional loans. The VA doesn't set a minimum credit score, but lenders have their own borrowing criteria.
Unlike some other low down payment mortgages, VA loans require no mortgage insurance.
However, there's a one-time VA funding fee paid upon closing (some borrowers are exempt). The amount depends on several factors, and for first-time VA loan borrowers, it ranges from 1.4% to 2.3%.
Created by the government to make homeownership more accessible for Americans in eligible rural areas, USDA loans require no down payment and can be used to build, rehabilitate or improve properties. These loans are intended for primary residences only and have other income and property restrictions. USDA loans have no minimum credit score, though alternative sources may be required to verify that you have a history of making payments on time if your score is below a certain threshold.
USDA loans come in two forms: direct from the USDA, or via a private lender (and USDA-backed):
- Direct USDA loans are for low or very low income borrowers only, who don't currently have access to "decent, safe and sanitary housing." This program offers payment assistance to temporarily lower the cost of a mortgage.
- USDA-backed loans are issued by private lenders, who set the interest rates. These are for low to moderate income homebuyers, without a requirement for need. These are also 100% financed, meaning zero down payment, with no mortgage insurance required.
Loans That Allow Low Down Payments
If you're not eligible for loans that don't require down payments, there are plenty of options with low down payments:
Down payments for these government-backed loans are as low as 3.5%. FHA loans are insured by the Federal Housing Administration and typically have lower closing costs—and credit score requirements—than conventional loans. There's a 580 minimum FICO® Score☉ for the lowest down payment option, though credit scores can be as low as 500 as long as you put at least 10% down. It must be for a primary residence, and there are some additional restrictions on property type and value.
These loans still carry closing costs, though they can be rolled into the loan amount. Additionally, FHA loans require mortgage insurance to reduce risk to the lender. Your upfront mortgage insurance premium is usually 1.75% of the loan amount. You'll also have an ongoing annual mortgage insurance premium (paid monthly) that usually costs between 0.45% and 1.05% of the loan amount. With conventional loans, mortgage insurance typically disappears once you hit 20% equity; with FHA loans, however, it remains for the life of the loan unless you put down at least 10%; then it goes away after 11 years.
Freddie Mac Mortgages
Government-sponsored agency Freddie Mac offers a few products via mortgage lenders. The Freddie Mac Home Possible mortgage allows down payments starting at 3% and is geared toward low income homeowners. Even borrowers without credit scores are eligible to borrow with as little as 5% down. Mortgage insurance is required on single-family homes until 80% equity is reached, though coverage requirements can be reduced at 90%. This type of loan allows down payment and closing costs to come from a variety of sources, and it permits co-borrowers to contribute even if they won't reside at the home.
Freddie Mac also offers HomeOne for first-time homebuyers buying single-family homes with down payments as low as 3%. Mortgage insurance required, and at least one borrower must have a credit score.
Some lenders also offer conventional loans with low down payments. One example is Wells Fargo's Dream. Plan. Home. mortgage that permits down payments as low as 3%, and has flexible credit and income standards (though mortgage insurance is required). Other lenders allow for lower down payments on conventional loans, but those options may be reserved for borrowers with strong credit scores.
Do You Need Good Credit for a Low Down Payment Loan?
You don't necessarily need a good credit score to get a mortgage with a low down payment. Conventional loans often do require solid credit scores, especially if you want a lower down payment. You'll typically need at least a 620 FICO® Score, and potentially a score of 660, to qualify for a conventional loan. Plus, the better your credit, the better terms you can qualify for.
But some no or low down payment loans, like FHA loans, have lenient credit score requirements in order to be more accessible.
Either way, it's smart to get your credit mortgage-ready, taking steps to reduce debt and paying bills on time. Also, keep an eye on your credit score and report in the months leading up to your mortgage application to ensure there's nothing that could harm your chances of approval. For the time being, avoid any new applications for credit unless it's necessary, as loan applications can lower your credit scores or even cause a mortgage lender to rethink your application if you're already in the middle of the approval process.
What Are Your Other Options?
If you can't qualify for these loans or meet down payment minimums, here are some strategies to consider:
- Seek out down payment assistance programs. These are offered by charities or government agencies for homebuyers struggling to afford down payments. They come in various forms, such as grants that don't need to be repaid, 0% interest forgivable loans and savings matching programs. Down Payment Resource has a database of these programs.
- Take more time to save. Consider staying put so you can spend more time saving for a larger down payment.
- Look for additional income. Find additional work to accelerate your down payment savings. If this isn't possible, aim to tighten your budget to free up funds you can put toward your down payment.
- If you have time, make an effort to improve your credit. Look over your credit reports from all three credit bureaus. You can get copies of those reports for free through AnnualCreditReport.com. You can also get your free credit score and credit report through Experian to see where you currently stand, and make efforts to drive that score up, such as decreasing existing debt balances. Improving your score will open the door to more mortgage opportunities—and, potentially, your new home.