Low Down Payment Mortgage Options Roger Odoardi Reviewed by: Jason Caruso It’s no secret that one of the biggest challenges in getting approved for a home mortgage loan is coming up with that hefty down payment. Traditional down payments of 5%, 10% and even 20% cost would-be homebuyers a lot of money and are among the biggest reasons people don’t end up entering the housing market. But what if there was a way to buy a new home that didn’t involve forking over thousands upon thousands of your hard-earned dollars? There are several low down payment home loan programs available for first time home buyers who are strapped for cash and eager to enter the real estate market. “Fannie and Freddie’s new 3% down payment programs are an additional tool to make homeownership affordable. But even though these programs lower the required down payment, it’s still important to work with your broker to understand your debt-to-income ratio, your monthly payments and ensure that this is a sound decision.” – Jason Caruso, Director of Operations, Blue Water Mortgage Low Down Payment Home Loan Options There are many low down payment home loan options, ranging from 0% down to 10% down. These allow buyers with fewer funds in the bank to apply for mortgages. For example, with a 3% down payment, someone buying a $300,000 home would only have to come up with a down payment of $9,000 as compared to $15,000. That $6,000 difference can mean a lot to a first time homebuyer. Here are a few common low down payment options, which we’ll cover below. FHA USDA VA 97% LTV Piggyback Loans Conventional 97% Freddie Mac’s Home Possible Mortgages The Home Possible mortgage program by Freddie Mac is a popular choice for first time home buyers and low-income borrowers. This program is open to anyone who meets certain requirements, but first time home buyers must participate in homeownership education and counseling program. One of the main benefits of the Home Possible Mortgage is the low 3% down payment. Requirements of the Home Possible program include but aren’t limited to: All participants will have to pay for private mortgage insurance. Minimum credit score of 660. Qualifying income is limited to 80% of Area Median Income. Fannie Mae’s HomeReady Mortgages Fannie Mae’s HomeReady Mortgage program is popular with those looking for a flexible, competitive mortgage option with a 3% down payment. First time homebuyers must take a homeowner education course from a qualified provider. Requirements of the HomeReady program include but aren’t limited to: All participants will have to pay for private mortgage insurance. Minimum credit score of 620. Qualifying income is limited to 80% of Area Median Income. The move to create a low down payment home loan by both Fannie Mae and Freddie Mac are considered by many mortgage industry experts to “broaden the pool of home buyers and boost the real estate market.” They are also expected to help first time home buyers who have good credit but little cash and have otherwise remained on the sidelines throughout the housing market recovery up until this point. Many homebuyers, especially in this economy, don’t have the funds for a 20% down payment. This is contradictory to the increasing home prices. In fact, according to the National Association of Realtors, the median home price in October 2021 was $353,900, which is a 13.1% increase from the October 2020 price of $313,000. These programs now make saving for the inevitable down payment much more achievable than ever before. Low Down Payments with an FHA Loan The FHA (Federal Housing Administration) loan is a popular program with first time homebuyers. It is also available to homebuyers who have experienced bankruptcy or foreclosure. The down payment can be as low as 3.5% with a FICO® score of at least 580. With a score less than 580, a 10% down payment will be required. Requirements of the FHA loan program include but aren’t limited to: MIP (Mortgage Insurance Premium) is required. Debt-to-Income Ratio must be less than 43%. The home must be the borrower’s primary residence. USDA Loans Growing in popularity, the USDA (United States Department of Agriculture) loan program is available in most regions across the country. A USDA loan is an advantageous loan option for those who are looking for single-family homes in rural areas and want a low down payment — or no down payment. Requirements of the USDA loan program include, but aren’t limited to: Applicants must use the property as their primary residence. Applicants must meet income eligibility (which varies from state to state). VA Home Loans The VA (Veterans Affairs) home loan programs doesn’t require a down payment or private mortgage insurance. It has competitively low interest rates and is backed by private lenders (not the federal government). Requirements of the VA loan program include, but aren’t limited to: Applicants must be active or have been in the military. Applicants must use the property as their primary residence. Must meet income eligibility (which varies from state to state). 97% LTV Loans The 97 loan is named such because its loan-to-value ratio can be as high as 97%, which means 3% is required for a down payment. In order to qualify for a Conventional 97 loan, a borrower cannot have owned a property within the past three years and must have a minimum credit score of 620. Piggyback Loans A piggyback loan is a second mortgage taken out at the same time as a primary mortgage to finance one property. With a piggyback loan, the minimum down payment is 10%, rather than the traditional 20%. A borrower would take out a mortgage for 80% of the home’s value, but instead of putting the 20% down, another loan is taken out (usually 10%) for a cash payment. For example, a house costing $500,000 would look like this: $50,000 down payment (10%) $400,000 first mortgage (80%) $50,000 piggyback mortgage (10%) Comparison Chart Loaner Minimum Down Payment Minimum Credit Score Pros/Cons PMI (Premium Mortgage Insurance) required? Freddie Mac Home Possible 3% 660 Pros Great for first time homeowners You can buy a house earlier Don’t need to save up for a large down payment Lower PMI requirement than conventional loans Cons Middle- to high-income borrowers may not qualify Can’t be used for investment property High credit score is required Private mortgage insurance is required Yes Fannie Mae HomeReady 3% 620 Yes FHA Loan* 3.5% 580 Pros Low down payment make this an accessible loan Monetary gifts from family members, domestic partners and friends can be used for a down payment FHAs are assumable Co-signers are allowed Allows for higher debt ratio and lower credit score Cons Stricter loan limits than conventional loans PMI tends to be high Yes USDA Loan 0% None required, but most lenders suggest 640 Pros No down payment required Cons Geographic restrictions Only for primary single-family residence No VA Loans 0% N/A Pros No down payment required Low interest rates Seller can pay certain closing costs Cons Must pay VA funding fee More restrictions on eligible properties Must be applied to a primary residence No 97% LTV Loans 3% 620 Pros No income limits High maximum loan limits Cons At least one owner must be a first time homeowner Only eligible for a primary single-family residence Yes Piggyback Loans 10% Varies depending on lender, around 680 Pros No PMI needed Smaller down payment Cons Can be difficult to qualify for High credit score requirement Double the closing costs No FAQs About Low Down Payments Q: What is the minimum down payment to pay for a mortgage? A: That depends on what type of loan you are looking for. Some loans, like a USDA or VA loan, can have no minimum down payment. Other low down mortgage options can be as low as 3% down. Q: How do I know if I need mortgage insurance? A: It depends on the insurance program. Typically, FHA and conventional loans under 20% of the property value will require mortgage insurance. Your mortgage professional can tell you if you need mortgage insurance. Q: How much does mortgage insurance cost? A: Your mortgage insurance cost will depend on factors such as loan and down payment amount, credit score and type of mortgage. With these factors in mind, the average mortgage insurance rate costs between .58% and 1.86% of the loan. Q: Who should take out a low down payment mortgage? A: Low down payment mortgages are popular among first time homebuyers and homebuyers who don’t want to (or can’t) put a 20% down payment on a property. At Blue Water Mortgage, we’ve got your back, even if you’re concerned about your credit score. Our team of experienced mortgage professionals has helped numerous clients secure the low down payment loan they need. Contact us today to find out how we can help you. Roger Odoardi Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.