Low Down Payment Mortgages: Programs, Pros and Cons

 August 30, 2021
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We’ve all heard the conventional wisdom that you should put 20% down when you buy a home. But it’s possible, and sometimes smart, to apply for a low down payment mortgage.

Home loans with a low down payment come with varying eligibility requirements and fine print, but this is true of all of them: You can secure financing for a property with anywhere from 0% to 10% down, at the possible expense of a larger loan balance and monthly private mortgage insurance (PMI) payments.

If you’re struggling to save up that 20% figure, here’s what you need to know about down payment assistance programs.

7 low down payment programs

Home loans with low down payment Minimum down payment Eligibility requirements Private mortgage insurance (PMI)
1. FHA loan 3.5% A minimum 580 credit score (though a lower score could qualify you for a 10% down payment) Yes
2. USDA loan 0% Income limits depend on the rural county where you plan to buy, and there’s no minimum credit score No
3. VA loan 0% Varies by lender, but military service is required No
4. Fannie Mae HomeReady, Freddie Mac Home Possible, mortgages 3% A minimum 620 credit score for Fannie Mae HomeReady®, though no credit score is necessary for Freddie Mac Home Possible® Yes
5. 97% Loan to Value (LTV) standard 3% Be a first-time homebuyer and meet your lender’s credit requirements Yes
6. Sweat equity programs Vary Be prepared to physically help build your home and perhaps your neighbor’s Vary
7. Piggyback loans 10% Vary by lender No

1. FHA loan

One of the easiest loans to qualify for with a low down payment is the FHA loan. You don’t actually get your loan from the government, but the Federal Housing Administration does back the loan. This allows lenders to take a bit of a risk on you.

With the FHA loan, you can put down as little as 3.5% for a down payment. If you are buying a home for $200,000, that’s the difference between saving $40,000 for the traditional 20% payment or $7,000. For most people, it’s easier to save up the smaller amount.

Plus, with the FHA low down payment mortgage, credit requirements are a little looser. If you are struggling to repair your credit, the FHA loan can be a good choice.

Credit score 580 or higher Below 580
Down payment 3.5% 10%

2. USDA loan

Another government program, this one through the USDA, can help you buy a home with no money down at all. You do have to buy in an area considered rural, however, if you want home loans with no down payment from this program. As long as you meet the income and credit requirements, which varies by location, you can get 100% financing to help you buy your home.

3. VA loan

Do you have a history of military service? You might qualify for 100% financing with the help of the Department of Veterans Affairs (VA) and VA loans. This is another of those programs that help you get home loans with no down payment. Depending on your status with the military and other factors, you might be able to get a home loan without any money down.

4. Fannie Mae HomeReady, Freddie Mac Home Possible mortgages

Looking for a low down payment? You can take advantage of the HomeReady® mortgage, which is backed by Fannie Mae, or a Home Possible® mortgage, which is backed by Freddie Mac. You only need 3% down to take advantage of this mortgage. This offers a savings of $1,000 over the FHA loan on a $200,000 mortgage.

The HomeReady mortgage is aimed at homebuyers with low and middle incomes. The credit requirements are more stringent than what you see with the FHA loan, though. Fannie Mae says you’d need at least a 620 credit score to qualify, while a 680 score or above could lower your rate. You may be able to qualify for Freddie Mac’s low down payment mortgage without a credit score at all.

Income requirements with HomeReady and Home Possible take into account everyone living in the household. So, if you want to buy a home and have your parents live with you, it’s possible to include their income in the calculations. You can also count the income of children whose income contributes to your household.

5. 97% Loan to Value (LTV) standard

Another interesting low down payment mortgage option is this Conventional 97% loan-to-value product, which is also offered by Fannie Mae. This is another program designed to help those with a small, 3% down payment. Unlike some of the other loans, this is considered a conventional loan. You do need to be a first-time homebuyer and meet credit requirements to qualify.

6. Sweat equity programs

Check into sweat equity programs designed to help you with a down payment on a home. With these programs, you “earn” your down payment by helping build your home, and contributing to the building of other homes. Many of these programs are run by nonprofits, such as Habitat for Humanity, or by local housing entities. Check in your local area for information about sweat equity and how it might be able to help you reduce your down payment.

7. Piggyback loans

For a while after the Great Recession of 2008 and the resulting housing market crash, piggyback loans all but disappeared. They’re still lacking in popularity these days. With this type of mortgage, you can get a home with a 10% down payment.

Basically, you get a loan for 80% of your home’s purchase price. This is a conventional loan, often backed by Fannie Mae or Freddie Mac. The idea is to access current mortgage rates for your home.

Next, you get a second loan, either a home equity loan or a home equity line of credit, for 10%. Now that you have that loan, all you have left is to pay the remaining 10% of the purchase price with cash. In some cases, the use of the piggyback loan can help you avoid paying private mortgage insurance.

Pros and cons of low-down payment mortgages

Even though you might rejoice at the idea of paying less than 20% down to buy your home and get to move in faster, it’s important to realize that you will pay higher costs in the long run.

First of all, there’s a reason lenders like to see you put at least 20% down. The fact of the matter is that they want to know that you have skin in the game. Remember: the lender is fronting you the money for your mortgage. They feel it’s less risky if you are putting a significant amount of your own cash toward the purchase.

Pros and cons of home loans with low down payments
Pros Cons
● Gain mortgage approval before you have saved up a 20% down payment ● Potentially higher interest rate on your mortgage
● Larger loan balance
● Greater overall cost in repayment
● Monthly dues for PMI (for most low down payment mortgages)

Your 20% down can help you get a better mortgage rate because you will be seen as less risky. A lower mortgage rate means that you save more money over the life of your loan.

Let’s not forget that your larger down payment means you borrow less to begin with. The less you borrow, the less you pay in interest — no matter your rate. Putting 20% down saves you money over time.

Run the numbers: $200,000 mortgage at 3.92% for 30 years
Down payment 0% 3.5% 10% 20%
Overall cost $340,427 $328,512 $306,384 $272,342
These numbers, pumped out by our mortgage calculator, don’t even account for the fact that you might have to pay a higher interest rate on your mortgage because you don’t have a bigger down payment.

Finally, realize that in most cases you will pay mortgage insurance if you don’t have 20% down. There are some exceptions, but you need to factor this cost into your total expense when you weigh the pros and cons of getting a low down payment mortgage.

Low down payment FAQs

Interviewing mortgage lenders and consulting the Department of Housing and Urban Development’s state-by-state resources is a good way to learn about your options. But if you still have questions about low down payment mortgages, hopefully they’ll be answered here.

What is the minimum down payment for a mortgage?

For a conventional mortgage, a 20% down payment will help you qualify (assuming you meet other credit requirements) while avoiding private mortgage insurance (PMI). Thanks to down payment assistance programs, however, you put 0%, 3%, 3.5% or 10% down on your loan application and still potentially gain mortgage approval. You might have to agree to take on a higher interest rate this way, and potentially have to make monthly PMI payments.

When do I have to pay mortgage insurance?

Generally, homebuyers must pay private mortgage insurance when they don’t make at least a 20% down payment on their chosen property. However, some low down payment mortgage programs, such as for USDA, VA and piggyback loans, don’t require mortgage insurance payments. That could make some down payment assistance programs more attractive than others.

For home loans with low down payments, keep in mind that you’ll typically have to make PMI payments until you have at least 20% equity in your home.

How much does mortgage insurance cost?

Your PMI payment varies depending on your loan balance and creditworthiness, among other factors. It could equate to 0.5% to 5% of your loan amount each year, according to ValuePenguin. So if your loan balance is $200,000 and your premium is 1%, your annual PMI dues would come out to $2,000.

Should I take out a low down payment mortgage?

If you’re struggling to save the 20% down payment needed for a conventional mortgage, you should weigh the pros and cons of home loans with low down payments. If buying a property in the short-term is worth the long-term costs of a potentially higher APR alongside PMI payments, then you’ll have your answer. Consulting with mortgage lenders and, better yet, unbiased certified financial professionals can help you reach the best decision for your situation — check out some places to find free advice in our separate guide.

Andrew Pentis contributed to this report.