The 20% Downpayment Myth
It’s a common misconception that a 20% downpayment is required to purchase a home. You may have heard this from a variety of sources, but it’s simply not true. In fact, many people purchase a home with much less. According to the National Association of Realtors®, the median downpayment among first-time buyers has been 6% since 2014.
There are certainly reasons to make a 20% downpayment if you can afford it – like getting a lower mortgage rate and avoiding extra fees that come with low downpayment options – but it can take years to accumulate enough savings (you can run your own estimate with our downpayment calculator). And waiting a few years to afford a 20% downpayment may come with consequences. Rising rents, home prices and mortgage rates could keep pushing the dream of homeownership further out of reach. Luckily, there are a variety of low downpayment loan options available.
Low Downpayment Loan Options
It can be shocking to realize how long it will take to save a 20% downpayment, but there are several low downpayment loan options that can help you achieve the dream of homeownership sooner. How much sooner? Use our downpayment calculator to see the difference it takes to save 3%, 5%, 10%, or 20% down based on your financial situation.
With a loan backed by private mortgage insurance, buyers are able to purchase a home with a downpayment as low as 3%. There are several payment options available, and depending on the form of private mortgage insurance, your payments might automatically cancel when your mortgage balance reaches 78% of the home's original value. Some lenders will even allow cancellation with an 80% balance.
With an FHA insured loan, buyers are able to purchase a home with a downpayment as low as 3.5% through a government program backed by taxpayers dollars. The program offers only one payment option – an upfront fee due at closing and a monthly fee. It’s important to note that the FHA does not allow buyers to cancel the premium payments, meaning a buyer must make the payments for the life of the loan. FHA premiums may also be tax deductible.
Private mortgage insurance is the private sector alternative to FHA, which is a government program backed by taxpayers. Another key difference is with cancellation. Some forms of private mortgage insurance may be cancelled when a loan reaches 78% loan-to-value, unlike FHA that may be paid for the entire loan term. And while both base the cost of their insurance premiums on a variety of factors, including your credit profile and other characteristics, their premiums are different, so it’s important to compare the cost of both options to see which makes the most sense for you.
Fannie Mae’s HomeReady and Freddie Mac’s Home Possible are two popular programs that offer low downpayment loans for qualifying low to moderate income homebuyers. Both are backed by private mortgage insurance, which means buyers can put as little as 3% down. Another benefit of a HomeReady or Home Possible mortgage is they have lower MI premiums than a traditional loan. Plus, unlike FHA, they don’t require upfront fees, and MI premiums may be cancelled.
VA loans provide a benefit by offering a long term financing option to American veterans. These programs are government insured loans and offer various downpayment options. To find out more about VA loans and whether or not you are eligible, go to the US Department of Veterans Affairs website or speak to a loan professional.
Downpayment assistance provides additional options for families that qualify (typically low to moderate income). These programs can provide assistance by giving favorable terms for second mortgages, grants, or gifts, but they can add steps to the homebuying process. An example of a national, non-profit downpayment assistance program is NeighborWorks America.
Many cities, counties, and states also offer downpayment assistance programs. You can contact your local county or city office and ask what they offer, or contact a real estate professional.