Buying a home is a dream for many, but saving enough money for a down payment can be a major obstacle. Luckily, you don’t always need a 20% down payment to buy a house. In fact, several loan programs help you achieve homeownership with just 3% down.
This smaller down payment may sound great, but there are disadvantages you should consider. Below, we’ll explore several 3% down payment programs, who qualifies and the pros and cons of putting 3% down.
Key Takeaways:
- Putting 3% down on a home means you pay 3% of the home’s purchase price up front while financing the rest.
- Several programs allow you to buy a home with just 3% down, but you have to meet specific eligibility requirements. These can include having a certain credit score or a low or moderate annual household income.
- A 3% down payment can help you get into a home more quickly, but you’ll have a larger monthly payment than you would if you put more down.
What Does It Mean To Put 3% Down On A Home?
A down payment is the money you pay up front toward a home’s purchase price, expressed as a percentage. You then borrow the remainder of the purchase price with a mortgage.
For example, if you make a 3% down payment on a $300,000 home, you’d pay $9,000 upfront. The remaining $291,000 would be financed with your mortgage.
For any given home price, the lower your down payment, the higher your mortgage amount – meaning higher monthly payments and a larger overall cost of borrowing. However, a 3% down payment also means less money spent up front. This option makes homeownership accessible to more people.
3% Down Payment Loan Options
If a large down payment isn’t reasonable for you, explore low down payment options. The following are common loan programs that accept down payments of 3%.
Conventional 97% Loan
Conventional 97% loans are backed by Fannie Mae, and as the name suggests, provide 97% loan-to-value (LTV) financing. These loans can be used to buy one-unit properties, including condos and co-ops. There are no income limits for this loan program, but you need a minimum credit score of 620 to qualify.
Conventional 97% loans are designed for first-time home buyers, so at least one borrower must be purchasing a home for the first time in order to qualify. If all borrowers are first-time homeowners, at least one needs to attend a first-time home buyer class.
Fannie Mae HomeReady Loan
Also backed by Fannie Mae, HomeReady mortgages are designed for low-income borrowers. Like conventional 97% loans, HomeReady loans require a credit score of 620. But there are income restrictions, too: You can’t make more than 80% of the area median income to qualify for this program.
You don’t need to be a first-time home buyer to qualify for a HomeReady loan, but if all borrowers are first-time buyers, you must complete a homeowner education course.
This program may be especially helpful to very low-income first-time buyers, as these borrowers can qualify for a $2,500 credit, available to put toward their down payment or closing costs.
Freddie Mac Home Possible Loan
Freddie Mac Home Possible loans are designed for low-income first-time home buyers. Those who haven’t owned a home within the last three years are also eligible. To qualify, you can’t earn more than 80% of the area median income. You also need a credit score of 660 or above.
You can only use a Home Possible loan to buy a primary residence, which can be a condo, single-family home, co-op or manufactured home. You can use gifts, grants or cash for your down payment and closing costs, but you may need to contribute personal funds if you’re buying a multi-unit property or manufactured home.
As with similar programs, homeownership education is required with a Home Possible loan when all borrowers are first-time home buyers.
Freddie Mac HomeOne Loan
Another option backed by Freddie Mac, HomeOne mortgages offer first-time buyers the chance to purchase a home with just 3% down. But unlike Home Possible loans, you don’t need to meet any income requirements to qualify for the HomeOne program.
HomeOne loans can only be used for purchasing single-unit properties. While manufactured homes aren’t eligible, a variety of other home types are. As with many other low down payment loans, home-buyer education is required when all borrowers are first-time buyers.
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Pros And Cons of 3% Down Payment Loan Options
Buying a home with a 3% down payment has its perks, but it has challenges, too. Weigh the following pros and cons if you’re considering this path to homeownership.
Pros
- Less savings needed: Putting 3% down – as opposed to 20%, for example – means you don’t need to save nearly as much money before purchasing a home.
- Start building equity sooner: With a smaller down payment, you may be able to buy sooner and start benefiting from home appreciation earlier than if you had waited to save more.
- Keep more cash on hand: The larger your down payment, the less cash you’ll have left over for repairs and house emergencies. With a smaller down payment, you have more flexibility up front for any inevitable surprises.
Cons
- Higher interest rates possible: The lower your down payment, the higher your interest rate may be. This is because lenders take on more risk by lending you more money, and they may compensate by making borrowing more expensive.
- Larger mortgage and monthly payment: A smaller down payment means a bigger mortgage. The bigger your mortgage, the higher your monthly payments and the more interest you’ll pay.
- Private mortgage insurance requirement: If you put less than 20% down, you’ll generally have to pay for private mortgage insurance (PMI). This protects the lender in case you stop making payments on your loan.
- Eligibility criteria: Some 3% down payment home loan programs have strict criteria you have to meet to qualify, such as being a first-time buyer or making less than the area median income. If you don’t meet such qualifications, you’ll have limited loan options.
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Bottom Line: Should You Buy A Home With Only 3% Down?
Buying a home with only 3% down might be your ticket to homeownership if saving a larger down payment feels impossible.
If you want to buy a home with a down payment of 3%, you have several options – especially if you’re a first-time home buyer. Just keep eligibility requirements in mind, as they differ by loan program.
Putting 3% down has disadvantages too, like higher monthly payments and the need to purchase mortgage insurance. Weigh these challenges against the perks of a 3% down payment before applying for a loan.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
