The housing market is rising in some areas of America and falling in others. If you find yourself in a hot seller’s market, it can be challenging to buy a house, but doing so, even with a low down payment, is possible.
Lenders are willing to approve low-down-payment mortgages if you qualify and are comfortable with paying mortgage insurance.
Read on for advice on navigating the real estate market if you have a small down payment but a fair amount of competition from other prospective buyers.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
What Is Considered a Low Down Payment?
While many people believe you need at least a 20% down payment to buy a house, the average down payment on a house at the end of 2023 was 8%.
Given the wide range above, what’s actually considered a low-down payment? Popular mortgage programs out there may require as little as 3% down, and a couple of more specific home loan programs allow 0% down.
The reason why that 20% down payment figure keeps popping up is that any amount less than that will likely entail some form of mortgage insurance, an ongoing fee charged by most lenders.
💡 Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender who’s dedicated to closing your loan on time.
Challenges of Buying in a Seller’s Market When You Have a Small Down Payment
There’s truth to the saying “cash is king,” and that continues to be evident in a seller’s market, where real estate investors who pay all cash frequently outbid prospective first-time homebuyers.
Be ready for these potential challenges if you intend to buy a home with a small down payment.
Longer Closing Time
Closing on a home with a mortgage-contingent offer to buy takes longer than closing with a cash offer. There’s often more paperwork, and underwriters may take longer to ensure that your financials are in order before green-lighting your mortgage.
Lenders May Disagree With Mortgage Minimums
Just because a mortgage loan program allows for a 3% minimum down payment doesn’t mean the lender will accept it. Lenders have wide latitude to dictate their own terms, and it’s fairly common for them to set their own minimum down payment requirement somewhere above what the stated minimum for the program is.
Home Sellers May Be Nervous About Your Ability to Close
While it’s true that all funds from your down payment and mortgage transfer to the seller at closing, many sellers still buy into the old “bird in hand” adage when it comes to accepting offers. A higher down payment signals a buyer’s financial capacity and is, therefore, more attractive in the eyes of the homeowner.
If sellers accept a bid with a low down payment, they may run an increased risk of the buyer being rejected at the last minute by their mortgage lender.
In a deal involving a mortgage backed by the Federal Housing Administration (FHA), if the home is appraised for less than the agreed-upon price, the sellers must match the appraised price or the deal will fall through.
And FHA guidelines require home appraisers to look for certain defects. If any are found, the sellers may have to repair them before the sale.
Recommended: Private Mortgage Insurance (PMI) versus Mortgage Insurance Premium (MIP)
Tips for Buying With a Small Down Payment
If you’re trying to score a home with a small down payment, there are some ways you can approach it to increase your odds of buying the home of your dreams.
One way is to select a government-backed mortgage program — FHA, or the US Department of Agriculture or Veterans Affairs — that allows for a low down payment. The government guarantee makes them more palatable for mortgage lenders and easier for a homebuyer to afford.
Some specialized mortgage programs allow qualified buyers to put as little as 0% down; others, from 3% to 5% down. Some of the most popular low-down-payment mortgage programs are:
• VA loans (0% down)
• USDA loans (0% down)
• FHA loans (3.5% down)
• Fannie Mae HomeReady (3% down)
• Conventional 97 loan (3% down)
• Conventional mortgage (5% down)
Another option is to apply for down payment assistance. Many governments and nonprofits offer down payment assistance programs for first-time homebuyers — those who have not owned a principal residence in the past three years — in the form of loans or grants. Some lenders can even assist you in qualifying for these programs to help offset the upfront costs of homebuying.
Finally, you can also ask a family member, or sometimes a domestic partner, close friend, or employer, to help with the down payment by contributing gift money. The money can’t come with any strings attached, and a gift letter will likely be required. This is a popular option for parents and in-laws who want to help their children buy a first home.
💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls. Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.
Pros and Cons of Using a Low Down Payment
There are both benefits and disadvantages to submitting a small down payment on a home. Here are a couple of points to think about.
Pros of Using a Low Down Payment
• Gets you in a home faster than waiting to save for a bigger down payment.
• Start building equity earlier and avoid spending money on rent.
• Preserve cash for other investments, opportunities, and emergencies.
• Take advantage of current low mortgage rates, theoretically saving you money over the long run.
Cons of Using a Low Down Payment
• You’ll have to pay private mortgage insurance, or a mortgage insurance premium, which could add 0.5% to 1.5% of the loan amount to your annual housing costs.
• Your monthly mortgage payment will likely be larger, as the amount you borrow will increase the less you put down.
• Your lender may penalize you with a higher mortgage rate to offset the higher risk of a lower down payment.
• You run a greater risk of your home loan being underwater, should home values drop.
Recommended: Home Affordability Calculator
Tips for Managing a Seller’s Market
So what’s a prospective homebuyer to do if they find themselves in a seller’s market or a tight market and feel the cards are stacked against them?
One way to get a leg up on the competition is to get the ball rolling on financing early and make sure you have everything in place by the time you even submit an offer on a home.
Make sure you’re prequalified (which is when lenders have an idea of your income and assets before you start home shopping, so you have an idea of how much you can afford). Then, it can be smart to get preapproved, which is when you receive a letter from a lender stating that you qualify for a certain loan amount and rate. These steps can ensure that you’ll be ready to roll the second you find the right home.
Once you’ve submitted an offer on a house, make sure you’re ready when it comes to all documents and information requested by your chosen lender.
Another thing you can do is to find a good real estate agent who’s been through the homebuying process countless times and can advise you effectively.
Recommended: How to Buy a House in 7 Steps
The Takeaway
Buying a home with a small down payment, even in a seller’s market, is possible. With preparation and the right mortgage lender, you may be able to land a starter home or your dream home with a low down payment.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
Photo credit: iStock/sturti
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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