Reader question: “We are hoping to buy a house later this year but we cannot afford a down payment of 20%. I know the FHA program offers a low down payment, but I am hoping to avoid using it because of the extra insurance that’s required. Are there any low down payment options without using the FHA program?”
Short answer: Yes, it’s entirely possible to make a low down payment without using the Federal Housing Administration home loan program. There are a number of conventional (non-FHA) mortgage programs out there that offer low down payments for eligible borrowers. But you might still have to pay mortgage insurance, particularly if your loan-to-value ratio exceeds 80%.
That’s the short answer to your question. Here is a more in-depth look at how you could get a low down payment without using the FHA program.
Options for a Low Down Payment Without Using FHA
In this context, a “low” down payment is one that falls below 20%. Many home buyers choose to make a down payment of 20% because it allows them to avoid mortgage insurance (more on this later). But it’s not necessary to put 20% down when buying a house.
In fact, there are many different mortgage programs that allow for a lower upfront investment. The FHA program is one of them, but it’s certainly not the only one.
Let’s start with the FHA mortgage insurance program, and then look at some of the ways you could make a low down payment without using that program.
FHA loans: According to the Department Of Housing and Urban Development, borrowers who use a home loan insured by the Federal Housing Administration must make a down payment of at least 3.5%. Specifically, that’s 3.5% of the appraised value or the purchase price, whichever is less (see details here). You’ll also need a minimum credit score of at least 580 to qualify for this down payment option. The downside is that FHA requires two kinds of mortgage insurance. There’s an upfront and an annual premium, and you might have to pay the annual insurance for the life of the loan.
Conventional loans: A conventional home loan is one that is not insured or guaranteed by the federal government, which makes it different from the FHA program mentioned above. These days, many lenders offer conventional mortgage loans with down payments as low as 3%. That’s because Fannie Mae and Freddie Mac, the two government-sponsored corporations that purchase home loans from lenders, allow for financing of up to 97%. So this is one way to minimize your upfront investment. Private mortgage insurance (PMI) is usually required with a down payment this low.
Credit unions: This is another way you could get a low down payment without using the FHA loan program. Many credit unions these days are offering special programs for home buyers that include 100% financing. In other words, these programs eliminate the need for a down payment altogether. Some credit unions do require a down payment, but it still might be smaller than what you would have to pay when going through a regular mortgage lender. So it’s an option worth exploring. You can use the credit union locator at ncua.gov to get started.
VA loans: Military folks can qualify for 100% financing by using the VA loan program. So this is another way to get the low down payment (or actually no down payment) without going through the FHA mortgage program. Of course, this option is limited to military members and veterans, along with their spouses in some cases.
Down payment grants: There are a number of housing agencies and nonprofits that offer grants for home buyers. These grants are intended to cover the down payment expense and sometimes even closing costs. Some of these programs are limited to first-time buyers, but that definition is generally broad and often includes people who have not owned a home within the last few years. So even a repeat buyer might qualify. To research this further, do an internet search for your city and state followed by “home buyer program” and/or “down payment assistance.”
Mortgage Insurance Might Be Required
Home buyers who make a low down payment – whether it’s through the FHA program or a conventional loan – often end up paying mortgage insurance. This can increase the size of your monthly payments, as well as the total cost of the loan.
Generally speaking, any time a mortgage loan accounts for more than 80% of the home’s value, it will require mortgage insurance in some form (either private or government-provided). This insurance is designed to protect mortgage lenders and investors from potential default on the borrower’s part.
Statistically speaking, a smaller down payment increases the risk of borrower default. That’s why this insurance is required in certain cases where the borrower puts less money down.
Of course, if your number-one priority is to minimize your upfront, out-of-pocket expense, then the extra cost of mortgage insurance might be acceptable. The insurance premiums usually get rolled into your monthly payments, so they don’t necessarily add to your upfront expense.
Without the mortgage insurance industry, borrowers would have to wait longer and save more money in order to qualify for a home loan. So you might think of it as a necessary “evil.”
As you can see, there are a number of ways to get a low down payment on a home loan without using the FHA mortgage insurance program. Just remember that low down payments often bring the extra cost of mortgage insurance, specifically when the loan to value ratio rises above 80%. This is true for both conventional and government-backed mortgage products (though FHA insurance might follow you longer).