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.
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.
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.
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.
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.
- FHA: FHA Loan Qualifying Summary
- Mortgage 101: Do You Meet FHA Loan Qualifications?
- Bankrate.com: Conventional, VA, FHA Mortgage
- The Mortgage Professor: How Much Should I Put Down?
- Home Fair: Down Payment Options
- My FICO: Choose a Down Payment Option That You Can Live With
- Current FHA Mortgage Rates: FHA Loan Qualifications
- My FICO: Choose the Home Mortgage Loan Type That Makes Sense for You
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.