If you think you can't afford a down payment on a house, it might surprise you to know that you have a variety of mortgage financing options that may offer some flexibility with the down payment. Today’s mortgage market has evolved from the days when 20 percent was the standard down payment required to buy a home. Although 20 percent down still characterizes most conventional loans, you can find other types of mortgages for only 10 percent down – or less.
A 2018 report by the National Association of Realtors (NAR) revealed that the average first-time homebuyer made a 7-percent down payment (financing 93 percent), and the average repeat homebuyer made a 16-percent down payment (financing 84 percent).
You'll find a variety of mortgages available that require only a 10-percent down payment or less.
What Determines Down Payment Amount?
When shopping for your best-fit mortgage, you’ll find a sea of options. Different types of mortgages have different qualifying guidelines, all of which won’t suit your needs or preferences. The amount of the down payment that you’re required to pay depends on a variety of factors including the type of loan, the lender, your credit score and verifiable income. It’s a bit like putting a puzzle together; you simply have to find the interlocking pieces that come together and create the finished picture.
Low Down Payments on FHA Loans
You can make a down payment as low as 3.5 percent on a mortgage that’s insured by the Federal Housing Administration (FHA). This low rate is based on a credit score of at least 580. But if your credit score is at least 500, and you otherwise qualify for an FHA loan, you’ll still only need a down payment of 10 percent. The price you’ll pay for the benefit of having a low down payment is a mortgage insurance premium (MIP).
Mortgage Insurance Payments
If you default on a mortgage loan, mortgage insurance insures your lender against loss.
If you have an FHA mortgage, you’ll pay mortgage insurance premiums (MIP), which include a two-part payment – you pay one part as an upfront mortgage insurance premium amount (UFMIP), and the other part in monthly installments as an annual premium. The UFMIP portion is calculated at 1.75 percent of your loan amount, and the annual portion is calculated based on the loan amount, term of the loan and the amount of your down payment, which determines your loan-to-value (LTV) ratio.
For conventional mortgages, you’re required to pay private mortgage insurance (PMI) if you make a down payment of less than 20 percent. Premium amounts vary, depending on the amount of your down payment and the type of mortgage you have.
Zero Down Payment Mortgages
You can find other mortgage rates with 10 percent down or less. Some mortgages, such as a VA loan or a USDA loan, don’t require a down payment at all. VA loans are available to veterans, active members of the military and eligible surviving spouses. Backed by the U.S. Department of Agriculture, a USDA Rural Development Guaranteed Housing Loan also includes eligible suburban homes as well as homes in rural locations.
Benefits of Higher Down Payments
Even if you qualify for a mortgage that doesn’t require a down payment, you may choose to make one anyway. The higher your down payment, the more equity you’ll have in your home from the get-go, and the lower your monthly payments will be.
And if the housing market takes a downward turn, your higher down payment helps hedge against having negative equity. In other words, if you put 10 percent down on your home and the market drops by 5 percent, you’ll still have positive equity. But if you make a zero down payment and the market drops, you'll have negative equity and owe more than your house is worth.
- National Association of Realtors: 2018 Profile of Home Buyers and Sellers
- NerdWallet: FHA Loan Down Payments
- Bankrate: Mortgage Down Payment - What It Is, Who It Goes to and Where It Comes From
- The Mortgage Reports: You Don't Need a 20% Down Payment to Buy a Home
- Investopedia: Comparing Private Mortgage Insurance Vs. Mortgage Insurance Premium
- U.S. Department of Housing and Urban Development: Handbook 4000.1