4 ways to buy a home with a lower down payment
Conventional wisdom says that you need a lot of cash to purchase a home—20 percent of the purchase price for the down payment, to be exact. But is that really true? Not necessarily.
It turns out there are several avenues to home ownership that don't require putting down 20 percent of the purchase price. This is good news for buyers since that kind of down payment can quickly amount to tens of thousands of dollars—or more. And not everyone has access to that kind of cash.
Wondering how to buy a house without a huge down payment? Here are some options to consider, depending on your eligibility.
1. Conventional mortgages with Private Mortgage Insurance (PMI)
Many lenders allow homebuyers to take out conventional mortgages with less than 20 percent down as long as they pay for private mortgage insurance—PMI for short. This is a type of insurance that protects the lender if you miss loan payments. Some lenders offer mortgages to first-time buyers with as little as a 3 percent down payment, depending on your credit history.
Although PMI can put homeownership within reach if you don't have the cash for a large down payment, it comes at a cost to the homebuyer. PMI payments are usually calculated as a percentage of your home loan, which means you could be paying hundreds of dollars in PMI each month on top of your mortgage.
Some people dislike the idea of paying for insurance to protect the mortgage lender. But for others, PMI is worth it to be able to purchase a home with less than 20 percent down.
Beyond PMI, you may qualify for other income-based programs that offer assistance to buyers. Many mortgage lenders, including Fulton Bank, offer flexible solutions to assist buyers with everything from closing costs to locking in competitive interest rates.
2. VA loans for veterans and active service members
Home loans from the U.S. Department of Veterans Affairs can help veterans, active service members, and surviving spouses to purchase houses with no money down.
If you're eligible for a VA loan, you may also find competitive interest rates, which can help you save money on your mortgage payments.
Although VA loans offer many benefits for buyers—including no down payment required—be sure to read all the fine print and make sure you understand the process for qualifying for a loan. You will need to apply for a Certificate of Eligibility to verify to your lender that you are eligible for a VA loan. Although the VA doesn't enforce minimum credit requirements, your lender will likely take your credit score into consideration before approving your loan.
Review the VA Buyer's Guide to be sure you understand the ins and outs of this loan type.
3. USDA loans for buyers in rural areas
Shopping for a home in a rural or suburban community? A loan backed by the U.S. Department of Agriculture could empower you to secure a mortgage with no down payment at all.
USDA loans are available at 0 percent down. But to qualify for a USDA loan, you'll need to meet specific requirements.
For starters, you need to purchase a home in an eligible rural area. You can search for an address on the USDA website to see if your property is eligible for a USDA loan.
You also must meet certain income requirements: Buyers can't earn more than 115 percent of the median income in the area where they're buying a home. Buyers also must occupy the home as a primary residence, so USDA loans aren't an option for vacation homes or rental properties.
4. FHA loans for flexible credit requirements
If you don't have a strong enough credit score to qualify for a conventional loan, you may be able to secure a Federal Housing Administration (FHA) loan. These loans allow buyers to purchase a home with a down payment as low as 3.5 percent of the purchase price.
Similar to VA loans and USDA loans, FHA loans are government-backed loans that offer more flexible terms than many conventional mortgages.
Although FHA loans can be appealing due to their low down payments and flexible credit requirements, they also have a few drawbacks, including limits on loan amounts and extra paperwork for buyers.
The FHA doesn't administer loans directly; buyers must work with qualified private lenders to secure a loan. To look into FHA loan options near you, search for local lenders on the U.S. Department of Housing and Urban Development website.
Whether you're seeking a conventional loan or curious about your eligibility for government-backed loans, a trusted mortgage advisor can help you find the best option for you. By finding a loan with flexible down payment requirements, your path to homeownership could become a little smoother.