No 20% Down Payment? Tips for Home Buyers

The accepted rule of thumb for buying a home is to pay 20 percent of the purchase as a down payment. However, not everyone can afford such a hefty down payment. The U.S. Census Bureau reports that in May 2016 the average cost of a home in the United States was $358,900. You’d need more than $70,000 to make a down payment of 20 percent.

So, what if you can’t make a 20 percent down payment? What are your alternatives if you want to buy a home but don’t have tens of thousands of dollars sitting around?

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Smaller Down Payment with Private Mortgage Insurance

Even though we hear a lot about a 20 percent down payment, the reality is that most banks and credit unions are willing to loan you money, even without that large of a down payment. Most lenders are willing to accept a 5 or 10 percent down payment, and in some cases, the 0 percent down payment is making a comeback.

If you put that small amount down, though, you should expect to pay an extra price. You will often be required to pay private mortgage insurance (PMI). You pay this to protect the lender in the event of a default. Lenders take a risk by fronting the money for your house. A 20 percent down payment is considered enough “skin in the game” to placate lenders who worry about losing such a large amount of money. A lesser amount, however, makes lenders nervous. When you pay PMI premiums, you are paying for an insurance policy that covers lenders in the event you no longer make loan payments.

Federal Government Loan Programs

You can also find federal government loan programs that allow you to pay a smaller down payment. With an FHA loan, you might only need 3.5 percent down. The USDA and VA loan programs can help you get a home loan without putting any money down at all. However, with these programs, you will still need to pay an insurance fee. Note that the government isn’t loaning you the money; a bank or credit union is still making the loan, but the government backs it up. You will be subject to fees until you build a certain amount of equity in the home.

If you are looking for a way to reduce your down payment, and still get a reasonably good mortgage rate, one of these federal loan programs can be a good choice, as long as you are prepared for the added cost of insurance for the loan.

State and Local Loan Programs

Many states and cities provide their own programs for down payment assistance. Two of the most common types of programs you are likely to see on a state and local level include:

• First-time homebuyer: If you haven’t bought a home before, or if it’s been three years since you last owned a home, you might qualify for special financing and down payment assistance programs aimed at first-time homebuyers.
• Sweat equity: The idea behind sweat equity is that you help build your home in exchange for down payment assistance. You probably won’t be required to do anything specialized like plumbing or electric, but you might be asked to help with framing and with other tasks that can be done by most people.

Check the conditions attached to these types of programs, though, because there are usually requirements you need to meet and expectations for how long you will remain in the home before selling it. You might also need to pay extra fees for these programs, so pay attention to terms.

20 Percent Down Bottom Line

Anytime you try buying a home without 20 percent down, you will end up with extra costs. However, most of those costs can be rolled into your loan, so it’s not immediately painful — other than resulting in a higher monthly payment. Always compare your options!