The Lowdown on a Low Down Payment

How to pay the least upfront for a home.

By Erik J. Martin

Your first barrier to entry into the homeownership club can be a steep one: the down payment required to obtain a mortgage loan. That’s because many conventional loans today require at least 20% down if you want to avoid having to pay private mortgage insurance or want to get approved at all.

Considering that home sale prices nowadays are through the roof, and mortgage interest rates are inching up lately, it can be a tall task to raise enough scratch to cover even close to 20% down. Case in point: the national median home sale price was $386,000 in 2021, according to Redfin; if you had to make a 20% down payment on a home at that price, that would equate to $77,200.

But don’t despair: there are loan programs out there you may qualify for that require little to no money down, allowing you to get your foot in the door of that desire domicile more easily and quickly.

First, understand that the 20% down payment threshold is mostly about borrowers demonstrating their creditworthiness. If a borrower can afford to save for a down payment of that size, they can generally afford to make monthly mortgage payments, thereby avoiding having to pay private mortgage insurance which protects the lender in the event the borrower cannot pay their mortgage.

Lenders commonly follow the minimum 20% down rule as a good buffer for them to recoup their money if the borrower defaults and the lender has to foreclose on the property.

Fortunately, there are government-backed loan options to explore for which you need a much lower down payment:

• An FHA loan. This loan requires a minimum of 3.5% down if your FICO credit score is above 580, or a minimum of 10% down if your score is below that. However, you’ll be required to pay private mortgage insurance, typically over the life of your loan or until you refinance to a different loan.

• A VA home loan. If you are an active duty service member, veteran, surviving spouse, or other specially qualified borrower affiliated with the military, you can claim one of these loans, likely the most generous in the industry. That’s because a VA loan requires zero down, with no obligation to pay mortgage insurance. However, you will have to pay a funding fee at closing or have the fee rolled into your loan.

• A USDA loan. Like a VA loan, there’s no down payment needed for a USDA loan, but your home must be located in a designated rural area, income restrictions apply, and the residence must be a single-family home.

• A Home Ready loan. This Fannie Mae product requires only 3% down, but you typically need at least a 620 to 680 FICO credit score, your annual income cannot surpass 100% of the median income for that area, and other restrictions apply. A Home Ready loan is generally available to those with better credit than an FHA loan, with total down payment varying by incoming credit score.

• A Home Possible loan. This Freddie Mac loan also can be had for as little as 3% down but has eligibility rules similar to a Home Ready loan; be aware that you must earn less than 80% of the average monthly income for the area you’ll be purchasing in.

Another way to pay a lower down payment is to apply and qualify for a down payment assistance program, which may be available from resources locally, regionally, or nationally, including housing finance agencies available in your state, HUD local home buying programs, and sources like the Chenoa Fund and National Homebuyers Fund.

Keep in mind that, when you pay a lower down payment, there is a trade-off involved.

It’s going to cost you more in the long run in the form of a larger mortgage with some combination of a longer-term, higher interest rate, and/or higher payments, as well as possible mortgage insurance requirements.

Nevertheless, the aforementioned low down payment options can make a lot of sense for people who couldn’t otherwise afford a house or who want to take advantage of continued low interest rates or just snap up the right property.