Homeownership in the United States has fallen to a generational low, and a big reason for this is a lack of first-time homebuyers. In a recent survey by Trulia, 54% of renters cited "saving enough for a down payment" as their biggest obstacle to homeownership, more than credit requirements and other debt obligations. However, the idea that a big down payment is a requirement is a myth. Here are some options you should explore if you want to buy a home, but don't have a ton of cash.
US Home Ownership Rate data by YCharts.
Conventional loans with as little as 3% down
Conventional mortgages -- that is, those not guaranteed by the government and that conform to Fannie Mae or Freddie Mac's lending standards -- were quite difficult to get in the wake of the financial crisis. This was especially true if you didn't have 20% of the home's purchase price to put down.
Fortunately, it's gotten easier again in recent years. Conventional mortgages are now available with down payments as low as 3% thanks to programs from Fannie Mae and Freddie Mac. You'll probably have to pay private mortgage insurance (PMI) until your loan-to-value ratio drops below 80%, but this is a good option for borrowers who qualify.
To qualify for a loan with 3% down, you'll need a credit score of at least 660, plus six months' worth of mortgage payments in reserve. In addition, your totalmonthly debt payments -- including your new mortgage payment -- cannot be greater than 36% of your gross income. With a higher credit score, the reserve requirements can be relaxed and the debt-to-income maximum could be as high as 45%.
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FHA loans: Pricier, but good for poorer-credit buyers
If your credit isn't good enough to qualify for a conventional loan, a FHA mortgage may be an option. The down payment requirements are as low as 3.5%, and the funds can come from the seller or a gift.
Credit requirements for a FHA loan are relatively low. You can get a 3.5% down loan with a FICO score as low as 580, and you can get financing with an even lower score if you have 10% to put down.
The downside is the cost. FHA mortgage insurance premiums for a 30-year loan with 3.5% down are 0.85% of the outstanding balance per year, which is competitive with the PMI you would pay on a conventional loan, but there are two big caveats. First, while you can drop PMI after you pay down 20% of the home, your FHA mortgage insurance payments generally continue for the life of the loan. Second, you'll also pay an upfront mortgage premium equal to 1.75% of the loan amount.
VA and USDA: 100% financing for those who qualify
Veterans Administration loans are available to active-duty or retired military personnel who meet certain service requirements. Reservists can also qualify after serving for six years. If you qualify, a VA loan requires no down payment whatsoever, nor does it require mortgage insurance, so it's usually a smart choice for those who can take advantage of it.
U.S. Department of Agriculture loans are another 0%-down financing option, available to low- to middle-income homebuyers in areas that are defined by the USDA as "rural." There technically isn't any mortgage insurance needed with a USDA loan; however, you will have to pay an upfront and recurring "guarantee fee." Check the USDA's website for specifics and to determine whether a particular home would qualify.
Individual banks offer other options
In addition to the loan products I've already discussed, several banks have their own loans designed for aspiring homebuyers without a lot of cash to put down. For example, Regions Financial (NYSE: RF) offers its "Affordable 100" loan program, which provides 100% financing and with no mortgage insurance to borrowers with excellent credit.
I found out about the Regions program because someone used it to buy the last house I sold -- so these lender-specific programs do exist, and are being qualified for by actual, everyday homebuyers, not just an elite few. BB&T (NYSE: BBT) is another lender that offers a similar program with 97% financing to low- and moderate-income borrowers. I'm sure there are others, so it could be worth the time to check with your local and regional banks to see what unique programs they might offer.
Which is best for you?
In general, a VA loan is best if you qualify for one. If you aren't a veteran, but have decent credit, a conventional loan is typically a better choice than an FHA loan. And an FHA loan means that you don't need excellent credit or much money upfront, so if you can't qualify for any of the other options, it may be your best bet. Of course, don't forget to check with banks in your area to see what they offer.
The bottom line is that even if you don't have tons of cash in the bank, there are several options available to help you become a homeowner, so don't let a lack of savings keep you in a rented home you don't want to be in.
Matthew Frankel owns shares of Regions Financial. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
FAQs
Here's the bottom line: If you can't afford to put any money down on a home mortgage, you're not in a financial position to become a homeowner. It's probably still not a good idea if you can only put down a super small amount. That might be a harsh reality to face, but it's true.
Is it a good idea to buy a home with no money down? ›
Here's the bottom line: If you can't afford to put any money down on a home mortgage, you're not in a financial position to become a homeowner. It's probably still not a good idea if you can only put down a super small amount. That might be a harsh reality to face, but it's true.
What credit score do I need to buy a house with no money down? ›
Eligible borrowers typically include those with debt lower than 41 percent of income, a fairly good credit score above 620, no previous home ownership in the last 36 months, primary residence intent for the property being bought, and the overall financing is 97 percent maximum.
How to buy a house with very little money? ›
Consider an FHA loan
The FHA loan is a popular option that allows buyers to put as little as 3.5% down on a new home, which can be given in the form of a financial gift from family or from a qualified non-profit or government agency. Sellers can also contribute closing costs up to 6% of the sales price of the home.
What if I don't have enough money for a down payment on a house? ›
If you're a buyer who is well qualified to make monthly payments but feeling shut out from the housing market by a lack of upfront cash, ask your lender about low- or no-down payment loans, and also look into government grants and loans that can help make your dream of homeownership a reality.
What are the cons of no down payment? ›
Cons of no-down payment mortgages
- You'll have no or little equity. ...
- Your interest rate might be higher. ...
- You'll need a bigger mortgage, which translates to higher costs. ...
- You'll pay fees. ...
- Your offer for a home might not look as compelling.
Benefits Of FHA Loans. An FHA loan can grant many borrowers the opportunity to become homeowners – especially those who have a somewhat low credit score and a reasonably high amount of debt. Known to be more forgiving and less restrictive than some other loan types, FHA loans present numerous benefits.
What is minimum credit limit to buy a house? ›
The minimum credit score needed for most mortgages is typically around 620. However, government-backed mortgages like Federal Housing Administration (FHA) loans typically have lower credit requirements than conventional fixed-rate loans and adjustable-rate mortgages (ARMs).
What credit score is needed for a 300K house? ›
The required credit score to buy a $300K house typically ranges from 580 to 720 or higher, depending on the type of loan. For an FHA loan, the minimum credit score is usually around 580.
What credit score is needed to buy a $400,000 house? ›
Your credit score has less bearing on your ability to get a mortgage than you might think. The minimum FICO score for a conventional loan is 620. The best rate comes with a score of 740 or higher. There is no particular advantage to having a score of 800, although it is, of course, laudable.
- Use a no-down-payment mortgage. ...
- Use a low-down-payment mortgage. ...
- Get a gift, grant, or DPA loan to cover your upfront costs. ...
- Get the seller or lender to pay your closing costs. ...
- Consider a fixer-upper. ...
- Buying a foreclosure or short sale home. ...
- Improve your finances before buying.
Based on these figures, you would need to earn $331,671.43 annually to afford a $1 million home with a 20% down payment if you follow the 28% rule. Or, you would need to earn about $442,285.71 annually to afford the same home with no down payment based on this rule. Get preapproved for your new home today.
What is the Brrrr method? ›
What is BRRRR, and what does it stand for? Letter by letter, BRRRR stands for “Buy, rehab, rent, refinance and repeat.” It's like flipping, but instead of selling the property after renovation, you rent it out with an eye on long-term appreciation.
How does anyone afford a down payment? ›
Buyers manage the down payment in California the same way they do in other states where prices are lower: they save it, borrow it from their retirement account, or get a gift from a relative.
How to borrow money for a down payment? ›
5 ways to borrow money for a down payment
- Take out a HELOC or home equity loan. ...
- Get a loan from a friend of family member. ...
- Tap your retirement savings. ...
- Get a bridge loan. ...
- Explore down payment assistance programs.
If you don't have the money to cover closing costs, you could get a no-closing-cost mortgage. This type of home loan doesn't eliminate closing costs. Instead, it rolls your closing costs into the loan principal, so you repay it over time with interest.
What credit score is needed to buy a house? ›
The minimum credit score needed for most mortgages is typically around 620. However, government-backed mortgages like Federal Housing Administration (FHA) loans typically have lower credit requirements than conventional fixed-rate loans and adjustable-rate mortgages (ARMs).
How much down payment for a 500k house? ›
Conforming loan down payments can vary from 3% to 20% or more, so for a $500,000 home, you'd need between $15,000 and $100,000. Conforming loans, once again, follow Fannie Mae and Freddie Mac guidelines and usually offer competitive terms.
What is the house poor after buying a house? ›
Being house poor means you're spending an out-of-proportion amount of your income on your home, typically at the expense of other needs. Often, it's mainly the mortgage payment that causes this. But other costs can have an impact as well, including: Property taxes.
What credit score do you need for no down payment on a car? ›
Your credit score is crucial to determine your eligibility for a no down payment car loan. Most lenders require a FICO credit score of at least 680 before you can qualify.
