Posted 03/25/2018

by Tim Lucas

Tim Lucas has helped thousands of families buy and refinance real estate. He has been featured in Time, Realtor.com, Scotsman Guide, MyMortgageInsider.com, and more. Connect with Tim on Twitter.

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Myth: You need a 20 percent down payment to buy a home

Tim Lucas

The Mortgage Reports Contributor


In this down payment article:

Sub-20 percent-down mortgage options: Six ways you can buy a home with little or no money.

Closing costs: How to deal with fees above and beyond the down payment itself.

Down payment pros and cons: Why it’s often better not to make a down payment, and when you might want to.


You don’t need a 20 percent down payment

The 20 percent down payment myth has stopped many would-be home buyers from owning a home.

It’s a left-over idea from generations ago.

So-called financial experts, parents, college professors, and even real estate professionals pitched 20 percent down as a wise move. But is it?

Making a large down payment on a home can put you at more risk than making no down payment at all.

Plus, many programs waive the down payment requirement.

>>Verify your low down payment loan eligibility (Aug 18th, 2018)

Still, today’s home buyers are the unfortunate recipients of wrong information. What will it take for them to disregard the mythical 20 percent figure?

If you’re reading this (and are willing to read it until the end), you’ve proven that you are ready to reach a higher plane of home buying wisdom.

Can I buy a house without 20 percent down?

The simple answer is yes.

In fact, the massive upfront cost is not even typical. The average down payment for first time home buyers is just 6 percent according to the National Association of Realtors.

The 20 percent down payment myth is circulated to this day because you need 20 percent down to avoid mortgage insurance with most conventional (non-government) loans. But, as many homeowners have discovered, PMI is not bad. In fact, many buyers in previous years have made $13,000 per year by investing in PMI.

Since the advent of FHA loans in 1934, mortgages have not required 20 percent down. That was more than 80 years ago!

The following are ways in which you can buy a home with little down payment available, or even if you have no money at all.

The FHA mortgage requires just 3.5 percent down. But most first-time buyers don’t know that the down payment can be sourced from a financial gift or approved down payment assistance program.

VA mortgages require zero down. Plus, they require no monthly mortgage insurance, helping you buy more house for less money. 100 percent of the closing costs can come from a seller concession or via gift funds from family. Those with current and former military service are likely eligible. These loans are offered by most lenders across the country.

Conventional loans offer down payments as low as 3 percent.

  • HomeReady™: Allows non-borrowing household members to contribute toward qualifying income. Also, use roommate income and mother-in-law unit rental income to qualify
  • Home Possible® Advantage: A Freddie Mac 3 percent down loan offering reduced mortgage insurance
  • Conventional 97: Fannie Mae’s low down payment loan with no income limits and no first-time buyer requirement

USDA home loans require nothing down. Property eligibility is location-based. Homes outside of major metros are likely eligible. The loans are backed by the United States Department of Agriculture and offered by most mortgage providers nationwide. These loans are not for farms, but for typical single-family homes that happen to be in less-dense areas. USDA loans are available in every state.

5 percent down mortgage

For buyers purchasing their primary residence, not a second home or rental, many programs allow down payments of just five percent. Both Fannie Mae and Freddie Mac allow this. Depending on your debt-to-income ratio, you’ll need a FICO score of at least 680 or 700 to be eligible.

10 percent down mortgage

If you can come up with 10 percent down, you have more programs available — especially if your credit is less than pristine or your debts are on the high side. FHA, for instance, will allow a FICO score as low as 500 if you put 10 percent down.

Your private mortgage insurance costs also drop as your down payment percentage increases. For example, a national mortgage insurer charges buyers with a 700 FICO scores .93 percent  per year with 3 percent down, but just .60 percent with 10 percent down.

Piggyback loans require between five and ten percent down. Typically, you get an 80 percent first mortgage, a 10 percent second mortgage and put ten percent down. This eliminates the need for mortgage insurance. Piggyback loans, also known as 80/10/10 or 80/15/5 loans, are best for those with good credit and at least 5 percent down.

Down Payment Assistance (DPA) programs are becoming more popular by the day. Government-run programs, plus approved non-profits, offer gifts and no-interest loans to support homeownership in select communities. Nearly 90 percent of all single-family homes in the U.S. are eligible for some kind of DPA according to a study by RealtyTrac. All the major loan types mentioned above allow the borrower to apply DPA funds toward the required down payment, if any, and in some cases, closing costs.

Verify your low down payment loan eligibility (Aug 18th, 2018)

What about closing costs?

Keep in mind that you will pay closing costs even if you select a loan program with no down payment requirement.

Closing costs can range from 1 percent-4 percent of the home’s purchase price depending on many factors, such as your lender fees, property taxes, and escrow fees. The following are ways to help you pay for closing costs. You can realistically buy a house with no money if you get closing cost assistance in combination with a no-down-payment loan.

Lender credits help with closing costs

Request a lender credit in return for a slightly higher mortgage rate. The credit helps pay your mortgage closing costs and can even be applied to prepaid property taxes and other fees.

Seller concessions reduce or eliminate closing costs

The seller can issue a closing cost credit to pay for all or part of the buyer’s closing costs. Seller concessions are more available in markets that favor the buyer.

Down payment assistance can go toward lender and closing fees

Some mortgage types allow you to pay 100 percent of your closing costs with a down payment assistance program from a government or non-profit entity.

4 Reasons It’s Better Not To Put 20 percent Down

More cash available. It’s always a good idea to have cash on hand in case of a job loss or other unforeseen financial event. Those who put all their liquid assets into a down payment have no buffer to weather the storm.

Buy sooner. Home prices are rising about 5 percent per year. That’s $10,000 annually on a home costing two hundred thousand dollars. Waiting to save for a down payment leaves you chasing higher home prices.

Invest elsewhere. You could deplete your 401k for a down payment. It’s allowed. However, you’re probably better leaving retirement funds intact, or continuing to invest there. Removing funds for a down payment severely limits compound interest you could have earned. You might regret it at retirement.

PMI is actually a good investment. You might hear advice that you should put 20 percent down to avoid mortgage insurance. According to our research, PMI is a good investment yielding a 530 percent return over the past five years. Ask yourself this: would you pay $8,100 to get a paycheck of $43,000? That’s exactly what PMI holders have done over the past half-decade.

Verify your low down payment loan eligibility (Aug 18th, 2018)

3 drawbacks of making a small down payment

Mortgage insurance. Yes, it’s an extra cost. As mentioned above, though, it’s can be a good investment.

Higher mortgage rates — maybe. Making a small down payment typically only increases your rate for conventional loans. However, low down payment government-backed loans like FHA, VA, and USDA all come with lower rates than a conventional mortgage with 20 percent down.

Less equity. You will have less equity in the home if you make a small down payment. Arguably this is not a downside at all. Imagine the housing market turns south. Your home loses 20 percent of its value. Would you rather have lost your own money, or the bank’s?

How do I check my low down payment eligibility?

Your eligibility for a zero-down or low-down payment loan is available by talking to a lender or submitting your application online for review.

Within a day, you will likely know if you qualify. The lender reviews your income, credit, and other factors to determine your eligibility for certain programs. You choose which is best for you.

You might be surprised at what you qualify for.

Verify your low down payment loan eligibility (Aug 18th, 2018)

Get mortgage rates for loans with less than 20 percent down

It’s a terrific time to be a home buyer. Home values are rising in many U.S. markets; mortgage rates are about half their historical average; and, there is an abundance of low- and no-down-payment mortgages available for today’s buyers.

Compare today’s mortgage rates and verify what you’ll qualify for. Complimentary rate quotes are available with no obligation to proceed, and with no social security number required to get started.

Verify your low down payment loan eligibility (Aug 18th, 2018)

Tim Lucas

The Mortgage Reports Contributor

Tim Lucas has helped thousands of families buy and refinance real estate. He has been featured in Time, Realtor.com, Scotsman Guide, MyMortgageInsider.com, and more. Connect with Tim on Twitter.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

2018 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)