Home Loans With Small Down Payment: FHA, VA, and USDA Explained

It’s long been recommended to try to make at least a 20% down payment on a home loan. That way, you avoid having to pay mortgage insurance, and you’ll borrow less, which means paying saving big money in total interest paid. But not everyone can afford to put 20% down.

In fact, Americans are making smaller down payments nowadays than before. And more borrowers are opting for FHA and VA loans, too, which can be had for little to no down payment.

What’s behind these trends? What are the pluses and minuses of putting down less money and choosing a government loan? And how should you proceed if both options look appealing to you? This article has answers and advice from experts.

In this article (Skip to...)

• Making a small down payment: pros and cons
• FHA loans pros and cons
• VA loans pros and cons
• USDA loans pros and cons
• How to increase the chances of buying a home

The latest findings

U.S. homebuyers are making smaller down payments as affordability difficulties persist, and an increasing share of shoppers are picking home loans backed by the government, based on the latest data from Redfin:

• The typical down payment dropped to $62,468 this past April, down approximately 1% from a year earlier. This is the first annual decline in down payments in nearly 2 years.
• Down payments continue to average around 15% of a home’s price, roughly the same percentage tallied last year.
• Summer 2023 was the last time down payment dollar amounts fell year over year.
• Nearly one in three buyers pay for a home completely with cash.
• Meanwhile, FHA loans comprised 15.3% of mortgaged home sales in April, up from 14.2% last year. VA home loans rose to 7.2% of mortgaged home sales, their highest April level marked since 2020.

These numbers indicate that buyers nowadays are feeling the pinch of today’s market.

“Housing costs are near all-time highs, and mortgage rates hover around 6.8%. Buyers are stretched thin, so they’re toward cheaper homes or loans that let them put less down upfront – like FHA and VA mortgages,” says Steven Glick, director of mortgage sales for HomeAbroad. “Economic uncertainties like tariffs, potential recession risks, and the current housing market also play a role.”

Consider that the median home price of existing homes for sale today is $414,000, per the National Association of Realtors. With that price icing out many buyer candidates, sellers are more eager to negotiate lately, agreeing to lower down payments in order to close deals in a cooling market where there are now 34% more sellers than buyers. It’s a shift that makes sense, as buyers get more creative and lenders and sellers and lenders adapt to keep deals moving along when affordability is tight.

Personal finance expert and senior contributor at Save My Cent, Andrew Gosselin, says this news shouldn’t come as a shock to anyone.

“Buyers across the country are bringing smaller checks to the closing table,” he says. “People are responding to steep mortgage rates, stubborn inflation, and pay packets that have not kept up. When a savings account grows more slowly than home prices, the obvious move is to lean on loans that ask for less cash upfront. Government-backed programs are filling that gap.”

These numbers track with everything observed lately by Realtor Joy Aumann.

“People are stretched thin. Between inflation, higher rent, and job insecurity in some industries, many buyers just don’t have the luxury of putting 20% down. Government loans give them a way forward, and FHA and VA loans in particular offer the most practical path to owning a home right now,” she notes.

Pros and cons of making a smaller down payment

Let’s take a deeper dive into the arguments for and against making a smaller down payment.

Pros of making a smaller down payment

“A big advantage of a smaller down payment is that it allows you to purchase now without waiting and having to save up for a larger down payment, positioning you to negotiate for lower prices and seller concessions now – at a time when buyers have more leverage,” explains Travis Erickson, a mortgage broker with Bonelli Financial Group. “It also lets you keep more cash for other important expenses like repairs, furniture, and maintenance.”

For renters in particular, putting down less helps to get out of the rental cycle sooner instead of having to wait years.

Cons of making a smaller down payment

But the trade-off comes in your monthly payments. A lower initial stake equates to a larger loan balance, which leads to bigger payments due. Plus, with most loan programs, you’ll have to pay for mortgage insurance if your down payment is less than 20%, which can make monthly payments harder to manage. Ponder that mortgage insurance rates can span from 0.5% to 2% of your original loan amount annually.

“You’ll also have less equity in the home upfront, which could impact your need to sell or refinance the home in the future,” Erickson continues.

The benefits and drawbacks of pursuing government loans

There are actually three major government mortgage loans you can pursue today: FHA, VA, or a USDA loan. Although it appears that more borrowers are choosing FHA and VA loans, a USDA mortgage is also worth considering. Here’s a breakdown of the pros and cons of each of these loan programs.

FHA loans pros and cons

“FHA loans have lower down payment and credit score requirements than conventional loans and are more flexible on qualification as well. Also, the debt-to-income requirements are more lenient, typically allowing up to a 57% DTI,” Erickson points out.

On the other hand, FHA loans require upfront and monthly mortgage insurance premiums that stay in place unless you refinance to a conventional loan, and the maximum loan limits are typically lower than for a conventional mortgage. Also, sellers may be less inclined to work with a buyer pursuing FHA financing.

VA loans pros and cons

Perhaps the most generous home loan available, a VA loan charges a relatively low mortgage rate and doesn’t require any down payment or mortgage insurance. Plus, there are often no ceilings on what you can borrow if you have full military entitlement.

But few borrowers can qualify, as you have to be a veteran, active in the military, or a surviving spouse. There is a funding fee involved that can be costly, too. And as is true of any government loan, sellers may frown upon offers from VA-financed buyers.

USDA loans pros and cons

As with a VA loan, a USDA mortgage can be claimed for no money down. You won’t pay for mortgage insurance, but you will have to fork over an upfront guarantee fee plus an annual fee. Mortgage rates can be lower compared to conventional and FHA loans, too.

However, your property must be located in an eligible rural or suburban area, your earnings cannot exceed a certain threshold, the house will have to pass strict USDA criteria, and the seller may choose another buyer who has financing that’s easier to approve.

How to increase your chances of buying a home

To up your chances of paying less for a home purchase, follow these recommended tips:

• Clean up your credit. “Start by checking your credit reports and cleaning up anything you see there that’s dragging your credit score down,” advises Aumann. “Improving your credit score by several points could save you thousands in interest.” Other proven methods to increase your credit score include paying your bills on time, reducing your outstanding debts, keeping existing credit accounts open, not opening any new credit accounts, and keeping credit utilization low (don’t max out your credit cards).
• Create a realistic budget. Determine what you can afford by estimating your homeownership costs, which means principal and interest payments as well as property taxes, homeowners’ insurance, and maintenance/repair costs.
• Go lender shopping. “Compare among at least a handful of lenders to find the best deal. Terms can shift quite a bit from one lender to the next, and even a quarter-point difference in rate can save you thousands over time,” says Gosselin.
• Take advantage of low down payment options. Work with a trusted lender and explore different loan choices that require less money down, including government loans but also conventional loans like Fannie Mae HomeReady and Freddie Mac Home Possible mortgages, which each require as little as 3% down.
• Target starter homes. “Try to purchase a cheaper property. Look for fixer-uppers and smaller homes in up-and-coming areas,” Glick suggests.
• Ask sellers for concessions to help cover closing costs. “This is much more likely to happen in today’s market,” says Erickson.
• Collaborate with the right agent. Choose a real estate agent/Realtor who is experienced, knowledgeable, and reputable.
• Purchase with a trusted co-borrower if necessary. This person, who is on the hook with you for repaying your mortgage debt, may agree to split the costs involved.
• Check out down payment assistance programs. These resources provide grants and/or loans that can help you cover the costs of the down payment and closing expenses.

The bottom line

Don’t get discouraged if you can’t afford to put 20% down. There are several financing options worth exploring that require a lot less money upfront. Huddle with your lender and agent to pick a mortgage option that works best for your needs.

“Ultimately, what matters most is choosing the right home with a payment that is financially comfortable,” adds Erickson.