Borrow with 0% down to get into your new home sooner.
Experts will tell you that saving at least 20% of your new home’s purchase price for a down payment can get you the strongest rates and terms on a mortgage. But for a lot of buyers, that just isn’t possible. And with so many mortgage options out there, it may not be necessary for you to land your dream home.
Compare mortgages with low down payments
How small can my down payment be?
The standard down payment for most lenders is 20% of the property’s value. In industry terms, it means that you need to meet a loan-to-value ratio (LVR) of 80%, where “value” represents the cost of your new home. Using this LVR, a $300,000 mortgage would require a $60,000 down payment.
If you don’t have that kind of money to put down, you might qualify for a mortgage with a lower down payment through specific homebuying loans and programs:
- FHA loans. The Federal Housing Administration backs a series of loans designed to reduce the risk of lenders taking on new borrowers or those with lower credit scores. These loans often accept down payments as low as 3.5% of your home’s value. On a $300,000 mortgage, an FHA loan could mean a down payment of $10,500.
Private mortgage insurance. Select lenders will allow you to borrow up to 97% of your home’s value as long as you pay for PMI, which is designed to repay your lender if your mortgage goes into default. On a $300,000 mortgage, paying PMI could result in a private down payment as low as $9,000.
- VA loans. The US Department of Veterans Affairs guarantees loans for members of the military and their families with select lenders willing to accept no down payment with no credit score benchmarks.
- USDA loans. The US Department of Agriculture’s Rural Development mortgage program offers limited home loans with 0% down payments. Eligibility is open to those who live in rural areas.
- Navy Federal loans. Navy Federal Credit Union is the largest credit union by assets in the US, and it offers 100% financing to qualifying members of the military.
The difference between 20% and 3% is huge: If you’re buying an $300,000 property, it’s the difference between putting down $60,000 and handing over just $9,000.
There must be a catch, right?
Yes. It comes down to how risky a lender perceives you with a down payment of less than 80% of your property’s value.
If you borrow more than 80% of your property’s value as a mortgage, you’re required to pay private mortgage insurance (PMI) on top of your monthly repayment. PMI is designed to protect your lender if your mortgage ends up in default or your home ends up in foreclosure.
As far as cost, PMI can be up to 1% of your annual payments — which, depending on how much you borrow, can total $1,000 or more each year. After you’ve paid down your mortgage balance to 80% of your home’s original value, you can ask your lender to cancel PMI.
Low or 0% down payment mortgage options
Both FHA loans and private mortgage insurance offer low down payment options, but you’ll need to see what you qualify for first.
Insured by the Federal Housing Administration, FHA loans are designed for first-time homebuyers and those with low credit scores. They offer down payment options as low as 3.5% and require a minimum personal credit score of at least 580. If your credit score is between 500 and 579, you might still qualify with a down payment of 10%.
The FHA charges both an upfront mortgage insurance premium and an annual premium. The upfront insurance premium is a one-time payment of 1.75% of the total loan amount. The monthly annual premium is factored into your mortgage payment and ranges from 0.80% to 1.05%, depending on your loan term, total purchase amount and loan-to-value ratio.
Private mortgage insurance
You can opt into paying PMI with a down payment of less than 20% on your home loan with willing lenders. PMI safeguards the lender against you defaulting on your mortgage, decreasing the risk in taking you on as a borrower.
PMI typically costs between 0.3% and 1% of your loan amount on top of your mortgage payment. You can usually pay monthly or as an initial lump sum. And you could be eligible for a down payment as low as 3%, depending on your lender.
After your mortgage balance falls below 80% of your home’s value, you can cancel your PMI.
Loans backed by the US Department of Veterans Affairs are designed for qualifying veterans, active-duty servicemembers, members of the National Guard and Reserves and their families. VA loans offer up to 100% financing with no down payment required. To qualify for a VA loan, you must meet the basic service requirements of the VA.
Navy Federal Credit Union loans
The Navy Federal Credit Union offers financing of up to 100% for qualifying members. No down payment is helpful, but you’ll pay a funding fee of 1.75% for these loans. And you must be a member of the military, a civilian employee of the military, a member of the US Department of Defense or a family member.
The USDA offers a no-down-payment mortgage option through its Rural Development program. The loans are geographically limited to eligible areas as determined by the USDA.
USDA loans are designed for first-time home buyers. To qualify, you must meet the income limit for the county in which you live, which you can find on the USDA’s website. You must also be a permanent US resident with a steady income over the past 24 months and no bankruptcies or collections accounts in your credit history.
USDA home loans come with two fees: a 1% upfront guarantee fee that can be rolled into the total loan amount and a 0.35% annual guarantee fee.
Can I take out a personal loan for a down payment?
Yes. But depending on your financial circumstances, a personal loan may not be ideal to getting a mortgage. Personal loans tend to come with higher interest rates than a mortgage, and taking one on means repaying two loans at the same time that you’re paying new expenses that come with homeownership, like utilities and insurance.
If you need a personal loan for your down payment, lenders may see it as a red flag, potentially rejecting your application as a result. Talk with a mortgage professional before using this strategy.
Can I use my retirement fund as a down payment?
Yes. If you have a substantial retirement account, you can tap into it to buy a home. Before turning to your retirement accounts, you might want to confirm how your withdrawal will be taxed.
A Roth IRA account, for instance, allows you to withdraw your funds to buy a home without having to pay taxes on the withdrawal, whereas you may have to pay taxes to withdraw from a traditional IRA.
You might also be able to borrow from your 401(k), though it depends on your plans. Talk to your plan coordinator to learn more about withdrawals and fees.
Note that any money you withdraw from your retirement account will no longer accrue interest, so you’re losing both the amount you withdraw and any future interest you could have earned on it.
If you’re ready to buy a home but your savings account is slim, look for lenders that offer mortgages with low down payments. Ask as many questions as necessary to know the exact terms, fees and conditions you face.
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