There are many mortgage programs with different down payment requirements. Of course, you’ll get the best deal and lowest rate if you put at least 20 percent down. However, most first-time buyers can’t do that. If you want a $200,000 property, your down payment would be $40,000. If you’re starting from zero and saving $500 a month, it would take you more than six-and-a-half years to get there!
Down Payment Requirements
Fortunately, there are other options. I’ll list them here, from smallest to largest.
Zero Down: USDA and VA
These government-backed loans require no down payment at all. They even allow the home seller to pay some or all of your closing costs. To qualify for a VA mortgage, you must get a Certificate of Eligibility (COE). Request it from the VA yourself, or ask your lender to do it through the VA’s WebLGY system. VA mortgages have no mortgage insurance, but they do impose a funding fee. The funding fee depends on your military status, how many times you’re used VA loans, and how much you put down.
USDA home loans are also known as Rural Housing loans. To qualify for a USDA mortgage, you must buy property in an area designated “rural.” This does NOT mean you have to buy “in the sticks.” Many areas in smaller cities and just outside larger ones qualify. About half the people in the US live in areas designated “rural.” There are also income limits for this program. The Direct program is funded directly through the rural development office. To be eligible, your income can be only 80 percent of the median income for the area. The Guarantee program is funded through USDA-approved lenders and brokers. It is a guarantee program (like FHA and VA) with no subsidies, and the income guidelines allow up to 115 percent of the median income after certain adjustments. You can check your eligibility on the USDA’s Income and Property Eligibility Site. USDA loans have both a funding fee and monthly mortgage insurance. Their terms are 33 years, which helps make payments lower.
3% Down: Community Mortgages
The best deal in mortgage financing for first-time buyers is probably a community mortgage provided by Fannie Mae or Freddie Mac. Fannie’s program is called MyCommunityMortgage and Freddie’s loan is called Home Possible. The guidelines for these mortgages are established by the two government-sponsored enterprises, and they are underwritten and funded by private lenders. Not only do these loans feature low down payments, their mortgage insurance is much cheaper than that of FHA and USDA products. Both of these programs require first-time buyers to complete a homebuyer education course from an approved provider.
3.5% – 10% Down: FHA Home Loans
Those who are ineligible for the above-listed programs can apply for FHA-backed financing. FHA’s underwriting is relatively forgiving. FHA requires a credit score of at least 580 to be eligible to apply for a 96.5 percent mortgage, and will allow a score as low as 500 for those putting at least 10 percent down. However, very few borrowers get approved with scores that low. The average credit score for FHA-approved borrowers at the time of this writing is 689, while average score of conventional (non-government) loans is 756. FHA home loans have one big disadvantage — there is both upfront mortgage insurance and a monthly premium — and, unlike insurance for conventional loans, FHA mortgage insurance is required for the entire duration of the mortgage.
All of the above-listed mortgages have limits to their loan amount. They weren’t created so Donald Trump could finance a mansion with three percent down. In most cases, the limit depends on the location of the property and how expensive the local market is. The VA is an exception — the agency doesn’t limit loan amounts, but it limits that amount it will guaranty, and most lenders don’t want to go higher — so the limit in most cases for VA financing is $417,000 today.
5% – 50% Down: Conventional (Non-government) Loans
Finally, we get to conventional mortgages. Conventional loans are privately funded and guaranteed — there is no government backing. Because of this, these loans usually come with stricter guidelines and higher down payment requirements. The minimum credit score for these lenders is 620, but most successful applicants have higher scores than that. In general, the stronger your application package — good income, low use of debt, larger down payment — the lower your scores can be. The opposite is true — the better your credit and income, the lower your down payment can be.
For conventional loans with less then 20 percent down, you’ll almost certainly have to pay for mortgage insurance. The premiums are determined by your down payment amount and your credit rating. Conventional loans can be made for vacation and rental properties, unlike government loans. For these homes, and for very expensive properties, the minimum down payment may be higher than for your primary residence.
You can get away with putting very little down in many cases. However, there are trade-offs. The larger your loan, the higher your monthly payment. In addition, loans with less than 20 percent down usually require mortgage insurance, which can add hundreds to your monthly out-go. Finally, the best mortgage rates go to those with at least 20 percent down. If you have the money, it’s probably smart to use it.