Can I Avoid Paying 20% for a Downpayment?

Figure out a down payment for your mortgage.

Figure out a down payment for your mortgage.

A down payment is the biggest hurdle for first-time home buyers. Most conventional loans require 20 percent down — that's $40,000 on a $200,000 house and a lot to save up. There are ways to cut the down payment, but many of them will increase your monthly house payments. It's usually best to put down the most you can afford, even if it's less than 20 percent.

FHA Loans

A loan insured by the Federal Housing Administration (FHA) is probably your best option to pay less than 20 percent down. These are called FHA loans, but the FHA does not loan money — it guarantees a loan made by a bank or other lender. In some cases you can get an FHA loan with less than 5 percent down, if you have no recent history of bankruptcy or foreclosure.

FHA Qualifications

The basic qualifications for an FHA loan are two years of steady employment, preferably with the same employer, and statements for two years showing your income is steady or increasing. You also need a credit score of 620 or higher, although in a few cases no score is needed (if you have no bad history of late payments). Your monthly loan payments should be only about 30 percent of your gross income before taxes.

VA Loan

If you have military service, you may qualify for a Veterans Administration (VA) loan. These are similar to FHA loans but usually require no down payment. Rules for qualification are strict, and loan amounts are limited (depending on location) but can range up to $600,000 (and even, in some cases, more). You will have to pay some closing costs, and the loan must be for less than the appraised value of the house.

Private Mortgage Insurance

You can sometimes get a conventional loan with a down payment of less than 20 percent by buying private mortgage insurance (PMI). This is a policy that names the lender as beneficiary, to guarantee the loan will be paid if you default. PMI can be expensive, and some policies require a large initial payment ranging from one month to one year of premiums with an extra two months as a cushion. This payment can be almost as much as a down payment.

Piggyback Loan

You can cut your down payment on your basic mortgage with a "piggyback" loan, basically borrowing the down payment. This is a second mortgage, usually at a higher interest rate and for a shorter term, which covers just the amount of the down payment. With an 80-10-10 program, for instance, you put down 10 percent, borrow 10 percent and get a basic mortgage for 80 percent.

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