Fri. Jan 22nd, 2021

Saving a 20% down payment to get a mortgage is daunting — and it’s a myth that you need this much cash to buy a home. A range of low-down-payment mortgages and down payment assistance programs can unlock homeownership for people who lack substantial savings but can afford monthly house payments.

Here’s how you can buy a home with a low down payment that fits your needs. What you’ll learn here:

  • What is a low-down-payment mortgage?
  • What are the pros and cons of a low-down-payment mortgage?
  • How do you qualify for a low-down-payment mortgage?
  • What low-down-payment mortgage options are available?

What Are the Best Low-Down-Payment Mortgage Lenders of 2020?

Best for bad credit

Carrington Mortgage Services makes a range of mortgages, including refinancing, available to borrowers nationwide. The company, which provides conventional and government-backed mortgages, has funded $22 billion in home loans since 2011.

Before You Apply

  • Mortgage types: ARMs, conventional, FHA, home equity loans and HELOCs, jumbo, refinance, USDA, and VA
  • Minimum FICO credit score: 500
  • Maximum loan amount: $2.5 million
  • Better Business Bureau rating: A+

Best Features

  • Accepts applicants with credit scores as low as 500

  • Offers conventional loans with down payments as low as 3%

See full profile

Best for product selection

Guild Mortgage, founded in 1960, specializes in home loans and serves borrowers nationwide. The lender’s full suite of products includes conventional and government-backed mortgages and home equity loans.

Before You Apply

  • Mortgage types: ARMs, conventional, FHA, jumbo, manufactured home, refinance, reverse, USDA and VA
  • Minimum FICO credit score: 600
  • Maximum loan amount: varies
  • Better Business Bureau rating: A+

Best Features

  • Receives strong customer service ratings from the Better Business Bureau

  • Offers a broad range of mortgage products

  • Provides special mortgage programs for first-time buyers and manufactured homebuyers

See full profile

Best for low APR

New American Funding is a national mortgage lender with a variety of home loan options. The lender has processed more than $27 billion in mortgages.

Before You Apply

  • Mortgage types: ARM, cash-out refinance, conventional, FHA, HELOCs, jumbo, reverse, USDA and VA
  • Minimum FICO credit score: 500
  • Maximum loan amount: $3 million
  • Better Business Bureau rating: A+

Best Features

  • Provides multiple mortgage options, including low and no down-payment loans

  • Offers fixed- or adjustable-rate mortgages

See full profile

Best for VA loans

Veterans United Home Loans provides mortgages to veterans and military families in all 50 states and Washington, D.C., and specializes in VA loans. In 2019, Veterans United Home Loans generated the largest number of VA loans in the nation.

Before You Apply

  • Mortgage types: ARMs, conventional, FHA, refinance, USDA and VA
  • Minimum FICO credit score: 660
  • Maximum loan amount: $1.5 million
  • Better Business Bureau rating: A+

Best Features

  • Requires no military service

  • Sets no minimum loan amount

See full profile

Best for no down payment

Alliant Credit Union is a not-for-profit financial cooperative that serves customers in all states except Maryland. Borrowers can take out conventional, jumbo, refinance and home equity loans.

Before You Apply

  • Mortgage types: conventional, first-time homebuyer, HELOCs and refinance
  • Minimum FICO credit score: 620
  • Maximum loan amount: $2.5 million
  • Better Business Bureau rating: A+

Best Features

  • Issues no down-payment mortgages for first-time homebuyers with excellent credit

  • Offers mortgages to borrowers with FICO credit scores as low as 620

  • Allows a debt-to-income ratio of up to 50% for some loan programs

See full profile

Best for online service

Caliber Home Loans of Coppell, Texas, offers mortgages nationwide, including conventional, refinance, jumbo and adjustable-rate loans. Government-backed options are FHA, USDA and VA. Caliber has been in business since 2008 and is solely focused on home loans.

Before You Apply

  • Mortgage types: conventional, FHA, jumbo, refinance, USDA and VA
  • Minimum FICO credit score: 580
  • Maximum loan amount: $3 million
  • Better Business Bureau rating: A

Best Features

  • Offers a first-time homebuyer program

  • Accepts mortgage applicants with FICO credit scores as low as 580

See full profile

Best for low costs

Chase, one of the nation’s largest banks, offers mortgage and refinance loans for qualified borrowers. Home equity loans and HELOCs are also available.

Before You Apply

  • Mortgage types offered: ARMs, conventional, FHA, jumbo, refinance and VA
  • Minimum FICO credit score: 620
  • Maximum loan amount: $3 million
  • Better Business Bureau rating: A+

Best Features

  • Accepts down payments as low as 3%

  • Receives high marks from the Better Business Bureau

See full profile

Best for low down payment

PNC Bank is one of the largest U.S. banks, serving more than 8 million customers in all 50 states. PNC offers most types of mortgages.

Before You Apply

  • Mortgage types: ARMs, conventional, FHA, first-time homebuyer program, home equity, HELOC, jumbo, refinance, USDA and VA
  • Minimum FICO credit score: undisclosed
  • Maximum loan amount: $5 million
  • Better Business Bureau rating: A+

Best Features

  • Offers multiple types of mortgages

  • Provides no or low down-payment mortgages

  • Supplies an online home ownership cost tool

See full profile

Best for large loan amounts

Bank of America serves roughly 66 million customers in all 50 states. The lender offers conventional, Federal Housing Administration, Department of Veterans Affairs and jumbo loans, as well as home equity lines of credit and mortgage refinancing.

Lender Highlights

  • Mortgage types: ARMs, conventional, FHA, first-time homebuyer program, home equity lines of credit, refinancing, VA
  • Minimum FICO credit score: 600
  • Maximum loan amount: $5 million
  • Better Business Bureau rating: A+

Best Features

  • Wide variety of mortgages

  • Annual percentage rate or closing cost discounts for qualifying Bank of America and Merrill Lynch clients

  • No closing costs and no annual, balance transfer and cash advance fees for HELOCs

See full profile

What Is a Low-Down-Payment Mortgage?

A low-down-payment mortgage is one that requires a down payment – the portion of your home’s purchase price you pay upfront – of less than 20%.

“Many borrowers with limited resources find these mortgages attractive because it allows them to save their remaining assets for incidentals and other unexpected expenses,” says Julienne Joseph, assistant director of government housing programs, Mortgage Bankers Association.

Down payment requirements for conventional loans typically range from 3% to 5%, sometimes up to 15%, depending on your bank and your credit. Government loan programs can go as low as 0% and up to 3.5%, although you may need to meet credit and income criteria and live in certain areas.

“We have to get over the fallacy that people need 20% down to buy a home,” says Bill Banfield, executive vice president of capital markets, Quicken Loans.

What Are the Pros and Cons of Low-Down-Payment Mortgage?

Is a low-down-payment mortgage right for you? You might decide to apply for a loan with a down payment of less than 20% for many reasons.

Consider these pros and cons:

Pros

  • You will bring less cash to closing.
  • You can access homeownership affordably.
  • You can keep more savings for emergencies.

With a low down payment, you can get into a home faster than waiting to save for a large down payment. Speed could help you take advantage of historically low interest rates .

“(A low down payment) provides the ability for people to buy a home and begin establishing wealth by owning an asset and paying down that debt,” Banfield says.

First-time homebuyers often choose low-down-payment mortgages because they do not have equity in a home to put toward a purchase. Also, you can preserve some of your savings for other costs or simply maintain a cash reserve for emergencies.

But there are drawbacks: Putting less money down means your monthly mortgage payments will be higher, and you will likely pay private mortgage insurance on top of that.

Cons

  • You will likely make higher monthly payments.
  • You will have little to no equity in the home.
  • You will pay higher interest rates.

“Keep in mind, when you get into a home for a low down payment, you’ll have little to no equity, so there are no funds to tap into for a cash-out refinance or home equity line of credit,” says Stephanie Hawley, senior loan officer at Flagstar Bank.

These options are generally available once a homeowner has 15% to 20% equity. “Be prepared that it might take you five to seven years before you can tap into those options,” Hawley says.

Also, buyers need to plan for expenses other than the down payment, including closing costs, inspections and an appraisal. “Someone with only 3% to put down might need to look at 0% down or down payment assistance because they’ll need to use that savings elsewhere to close on the home,” Hawley says.

How Do You Qualify for a Low-Down-Payment Mortgage?

The most important factor to qualify for any mortgage, including one with a low down payment, is a solid credit report.

“Take a look at your credit report before meeting with lenders, and be sure you are paying bills on time,” Banfield says. “If you can pay down balances, do that. And definitely do not open up new accounts, especially when you are in the homebuying process.”

Your FICO score can determine the cost of your mortgage and drive mortgage insurance prices up or down. For example, conventional low-down-payment mortgages are generally for borrowers with a 620 credit score or higher, says David Battany, executive vice president of capital markets, Guild Mortgage.

The Federal Housing Administration’s 3.5% down mortgage is available to buyers with a 580 credit score. If your credit score is below 580, you’ll probably need to put down 10% to get a mortgage, Banfield says.

However, some banks offer local programs for low- to moderate-income buyers who might be eligible for funds to assist with a down payment, closing costs or both expenses.

Be sure any money you will use toward a down payment and closing costs is in one bank account, especially if you plan to pull funds from investments, savings or other sources, such as gift money. “Have all of that in one account so it can be documented and is easy for someone who is not you to understand where the money will come from,” Banfield says.

What Low-Down-Payment Mortgage Programs Are Available?

If you’re having a tough time saving for a down payment and 20% down seems out of reach, you’re not alone — and there’s good news. You could qualify for several low-down-payment mortgage programs, depending on credit history, household income and neighborhood.

FHA Loan
The Federal Housing Administration offers a low-down-payment mortgage that allows you to put as little as 3.5% down. Borrowers can qualify with credit score requirements that are more lenient than conventional low-down-payment loans.

Your FICO score must be at least 580 to make a 3.5% down payment. For scores between 500 and 579, you’ll need a 10% down payment.

Your debt-to-income ratio – how much you owe each month compared with how much you earn – should be less than 43%, and you must provide proof of employment and steady income. However, keep in mind that these are the FHA’s standards, and lenders may impose more strict requirements.

U.S. Department of Agriculture Loan
The USDA’s Single Family Housing Guaranteed Loan Program is available for certain rural areas. Borrowers do not have to meet credit score requirements but must show an ability to manage debt and pay bills. No down payment is required, but you’ll pay an upfront guarantee fee and an annual fee.

VA Loan
The Department of Veterans Affairs, or VA, offers a zero-down-payment mortgage for qualifying veterans and spouses. A funding fee is charged at closing, which can be financed, Banfield says. Veterans who want to apply must furnish a Certificate of Eligibility, or COE.

HomeReady by Fannie Mae
Fannie Mae offers a 3% down payment loan for low- to middle-income homebuyers. Your credit score must be at least 620 to get a HomeReady loan, and if it is 680 or higher, you could get better pricing. Credit guidelines are tougher for this loan compared with the FHA loan.

Conventional 97
This Fannie Mae loan requires a 3% down payment but sets no income limits, as with the HomeReady loan. Buyers need a credit score of 620 or higher for this conventional loan.

Freddie Mac Home Possible Mortgage
This fixed-rate loan has a down payment as low as 3% and lower-cost mortgage insurance than FHA loans. The Freddie Mac Home Possible loan is available for those with credit scores of 620 or higher.

Fannie Mae HomePath Ready Buyer Loans
Fannie Mae offers a program for first-time homebuyers who want to purchase an REO property – a home owned by a lender or mortgage investor. You can put as little as 3% down and get up to 3% of the purchase price back as closing cost assistance for HomePath properties.

Low-Down-Payment Bank Loans
Lenders may offer their own low-down-payment mortgages and down payment assistance programs that help homebuyers get into a loan without a 20% down payment.

“Talk to a local lender who is a licensed professional and can share knowledge about the offerings in your area,” says Ann Thompson, retail sales executive-West, consumer lending, Bank of America. “Meet with lending specialists at more than one bank, and ask about programs because they vary.”

Some employers offer down payment assistance, Thompson says. State, county and municipal grant and loan programs may also be available to help you afford a mortgage down payment.

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