How to buy a home if you can’t save for a down payment

Categories: Homes Planning Real Estate

Published 04/09/2020

With millions of Americans facing financial burdens like student loans and high rents, saving up to make the traditional 20% down payment on a first home can be daunting. There’s good news for prospective homeowners: You don’t need to do it!

You can blame the difficult financial circumstances many young people find themselves in today. But misconceptions may be part of the problem too. Nearly half of renters said they believe they need at least a 20% down payment to buy a house, according to Bank of America’s 2018 Homebuyer Insights Report, although the government and most housing experts disagree.

"There’s a prevailing thought out there that you need to put 20% down to purchase a home, which is not the case," says Todd Sheinin, a loan officer at Homespire Mortgage in Gaithersburg, Md.

Of course, there are downsides to buying a home with little down. You must pay private mortgage insurance if you default on your loan, you may face a greater risk of going "underwater" if home prices fall, and that could potentially lock you into your home. Still, nationally more than half of the recent home buyers said they put down less than 20% on a mortgage, according to Zillow’s 2019 Consumer Housing Trends Report.

However, nationally more than half of the recent home buyers said they put down less than 20% on a mortgage. But here are five types of mortgages that will let you purchase a home with less than 20%—with some allowing for down payments as low as 0%.

Conventional 97 loan

Conventional 97 loans allow you to put 3% down on a home. They charge private mortgage insurance, typically between 0.4% and 1.5% of your loan amount, Sheinin says, but you can have your lender cancel PMI once you’ve gained at least 20% equity in your home.

You need a credit score of at least 620 to qualify. Some mortgage lenders may require a higher credit score, says Guy Cecala, chief executive, and publisher of Inside Mortgage Finance.

VA loan

The U.S. Branch of Veteran Affairs offers VA loans that give active or retired military, or a veteran's living spouse the potential to purchase a home with no cash down. Moreover, "VA loans have phenomenal interest rates and flexible lending guidelines," Sheinin says. Although the VA does not set a minimum credit score, most VA mortgage lenders require you to have a score of at least 580. VA loans require you to cover a funding fee of 2.3% of your loan, which is paid upfront or rolled into your mortgage payments.

FHA loan

Federal Housing Administration (FHA) loans were created for low- and moderate-income households that would otherwise be locked out of the housing market. They require a minimum down payment of 3.5% and a minimum credit score of 580, but borrowers with a credit score of 500 to 579 can qualify by making a 10% down payment. The drawbacks? You have to pay an upfront mortgage insurance premium of 1.75% of your loan amount, plus a monthly premium added to your mortgage payments that range from 0.45% to 1.05% of your loan amount per year. And the FHA will only offer loans up to the maximum loan limit in the county in which your home is located.

USDA loan

The U.S. Department of Agriculture Rural Development (USDA) loans are for homebuyers in towns with populations of less than 10,000. Geared toward low-income home buyers, they offer competitive interest rates and allow for down payments as low as 0%. However, you must pay a mortgage insurance fee of 2% of your loan amount at closing, and a mortgage insurance premium of 0.5% of your loan. Also, your preferred lender may not offer USDA loans.

Physician loan

Do you have a medical degree? You may qualify for a low-interest physician loan, also referred to as a "doctor loan" that allows you to make a down payment as low as 0% (loans above $750,000 require a low down payment) and doesn’t require you to pay mortgage insurance. Unlike a conventional loan, student loan payments that are in deferment do not affect whether you qualify for a physician loan. Mortgage lenders embrace writing a loan to doctors because doctors generally don’t default on mortgages and their income typically goes up over time. Most physician mortgage lenders require a credit score of 680 or higher, and a select number of lenders offer them, so you may have to shop around.

Note: physician loans are available to only a select group of doctors, including medical physicians (MD), doctors of osteopathy (DO), dentists (DDS/DMD), veterinarians (DVMM), and, in some cases, podiatrists (DPM) and optometrists (OD).

A word on down payment assistance programs

Still don’t have enough cash socked away for a down payment? You may qualify for a down payment assistance program that will provide you money to cover a portion, or potentially all, of your down payment. These programs are available at the local, state, and federal levels. There are more than 2,500 programs nationwide, so your best approach is to have your mortgage lender help you assess your options and eligibility.

To be directed to our preferred mortgage lender, assistance with any questions, or concerns, please contact Darryl Glass, your Realtor for life. You can call Darryl at (510) 500-7531, e-mail at dglass@adventpropertiesinc.com, or schedule a call in the future with Darryl directly on his calendar below: