When our parents and grandparents bought their homes, they likely had to save, for several years in some cases, to put down the required 20% down payment. The 20% down rule ensured that purchasers were serious and gave lenders peace of mind.
Due to inflation and other factors, home prices have now increased to the point that it’s difficult for many, including first-time home buyers, to put that amount of money down upfront.
The good news is, more modern loan offerings have largely relegated the 20% rule to the past, particularly for primary, owner-occupied properties. If you’re looking to buy a home, it’s not unreasonable to have a down payment of between 3% – 3.5%. There are even a couple of options that don’t require a down payment at all.
Over the course of this post, we’ll take a look at all of your home buying options, with and without a down payment. And, if you do make a down payment, how much of a down payment should you make? Let’s dive right in.
Can You Buy a House with No Money Down?
The short answer is yes, you can. There are couple of loan options out there that have no requirement to make a down payment.
USDA loans are backed by the U.S. Department of Agriculture with the goal of stimulating development in rural areas. In order to do that, one of the features of the loan is that you don’t have to make a down payment. There are also lower upfront and monthly guarantee fees (the USDA version of mortgage insurance) than you would see on an FHA loan.
There are two special stipulations to qualifying for a USDA loan: the location in which you’re looking to buy and your income.
The first part we’ll take a look at is location. The USDA program is intended for rural areas, although you may find you qualify if you live on the edge of suburbia as well. There’s an eligibility map you can check. Anywhere outside of an orange area is eligible for this program.
Other property requirements include that it can’t be a working farm, and you can only purchase single-unit primary properties.
In terms of income, the total earnings of all adults in the household (not just those on the mortgage) can’t exceed 115% of the area median income. If your house has more than four members, there may be slightly higher income limits and you can deduct certain expenses like childcare. The USDA has an income eligibility page to help you determine if you qualify.
Finally, you need to have a FICO® Score of at least 620 in order to qualify. Your debt-to-income (DTI) ratio, a comparison of your payment on debts like credit cards and car and home loans to your monthly income, should be 45% or lower for the best chance of approval.
Open to our nation’s veterans, eligible active-duty service members and their surviving spouses, VA loans are another option that offers the chance to avoid a down payment. In addition, instead of mortgage insurance, there’s a one-time VA funding fee (2.15% of the loan amount if you’re getting your first VA loan with 0% down). This can either be paid at closing or financed into the loan.
Although the VA doesn’t have a minimum credit score requirement, different lenders may have their own policies. Quicken Loans requires a minimum FICO® Score of 620 or higher.
Can You Buy a House with Low Money Down?
As we said above, it’s no longer necessary to be able to put 20% down to get a house. In fact, depending on the loan options you qualify for, it’s possible to get a home with a down payment as low as 3 – 3.5%. Let’s take a look at those options now.
Conventional Loan Options
Freddie Mac has a loan option called Home Possible where buyers can qualify with as little as 3% down.
A big stipulation for this option is that you can’t make more than 100% of the area median income in your county. Unlike USDA loans, this requirement is only based on the clients who appear on the loan. If you’re in an area Freddie Mac considers underserved, the income limits may not apply. You can use this search engine to check limits in your area.
If you happen to be looking at real-estate owned (REO) properties, you may want to take a look at the HomePath ReadyBuyer loan option.
Specifically for first-time home buyers, this option allows those who complete a homeowner education course and buy a property owned by Fannie Mae the opportunity to get into a home with as little as 3% down. In addition, you can get up to 3% of the purchase price back in closing costs from seller concessions.
Although you’ll need to have mortgage insurance when putting less than 20% down, you can avoid a monthly fee with a lender-paid mortgage insurance (LPMI) program like PMI Advantage. You can pay a one-time fee to offset the cost of the mortgage insurance or finance the cost into the loan by paying a slightly higher rate compared to loans with monthly borrower-paid mortgage insurance (BPMI). You can also do a partial payment at closing and lower your mortgage rate with LPMI.
If you do opt for monthly mortgage insurance payments, PMI can be removed once you reach 20% equity in your home, as long as you’ve stayed current on your loan.
If either of these options don’t work for you, the maximum down payment you’d be required to make on a primary property with a conventional loan is 5% down.
In order to qualify for any conventional loan, your FICO® Score should be 620 or higher.
FHA loans allow you to get into a home with a down payment of as little as 3.5%. In addition, buyers who are otherwise well-qualified (e.g. low DTI ratios) can get into a home with a FICO® Score as low as 580. This makes it a good loan for someone who’s working on their credit.
It should be noted that if you make a down payment of less than 10%, you’ll have mortgage insurance premiums for the life of the loan in addition to an upfront mortgage insurance premium paid at closing or financed into the loan.
However, the key phrase here is “for the life of the loan.” You can pay off your original loan by refinancing into a conventional loan once you reach 20% equity and not have to deal with mortgage insurance again.
How Much Should You Put Down?
Now that you know the minimum down payment you can make for a number of different loan options, how much should you put down? Let’s explore what you should consider.
Along with your credit score, the amount you put down is one of the bigger factors in determining your mortgage rate. In general, the more you put down, the lower your rate. You can also avoid mortgage insurance altogether by putting down 20% or more on a conventional loan.
However, you also don’t want to empty your entire life savings into buying a house. In order to close your loan, many loan options require that you be able to show you have a number of months’ worth of savings to cover the mortgage payment (principal, interest, taxes, homeowners insurance and if applicable, homeowners association dues). How much you need depends on the loan option, but a good guideline is at least two months’ worth.
You’ll also want to make sure you leave enough of an emergency fund for unexpected expenses like repairs or medical issues.
With that said, when buying a house, you should put down the minimum and then whatever your budget comfortably allows beyond that.
Do you think you’re ready to buy a home? You can get started online through Rocket Mortgage®by Quicken Loans. If you’d rather talk on the phone, one of our Home Loan Experts would be happy to walk you through the process if you give us a call at (800) 785-4788. Questions? Go ahead and leave them for us in the comments below.