Buying a Home in a Seller’s Market With a Low Down Payment

By Kenny Zhu · May 03, 2022 · 6 minute read

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Buying a Home in a Seller’s Market With a Low Down Payment

It has been difficult lately to buy a home with a small down payment, considering that the average home price rose by 17% in 2021, and cash offers and bidding wars remain a thing. But buying a house 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.

Here’s some help navigating the current real estate market if you have a small down payment.

What Is Considered a Low Down Payment?

According to the National Association of Realtors®, 45% of consumers think they need a down payment of 16% to 20% or more to buy a house. In actuality, the average down payment on a house in 2021 was 17%. If you look at just first-time homebuyers in that survey, the average down payment was closer to 7%.

Given the wide ranges 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.

Just keep in mind that anything under a 20% down payment will likely entail some form of mortgage insurance, an ongoing fee charged by most lenders.

Recommended: Private Mortgage Insurance (PMI) versus Mortgage Insurance Premium (MIP)

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 today’s 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.

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 U.S. 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 help you qualify 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 be key. This is a popular option for parents and in-laws who want to help their children buy a first home.

Recommended: Home Affordability Calculator

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.

Tips for Managing a Seller’s Market

So what’s a prospective homebuyer to do in a seller’s market when 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.

Making sure you’re pre-qualified, when lenders have an idea of your income and assets before you start home shopping, and then pre-approved, when you receive a letter from a lender stating that you qualify for a certain loan amount and rate, 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 Johnny-on-the-spot when it comes to all documents and information requested by your chosen lender.

Another thing you can do is to find an experienced real estate agent who’s been through the homebuying process countless times.

No matter the temperature of the market, tips for how to shop for a mortgage can come in handy.

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.

SoFi allows a down payment of as little as 3% for qualified first-time homebuyers and 5% for other borrowers for its line of low-fixed-rate mortgages.

Before you apply for a mortgage loan, start with a no-obligation home loan rate quote from SoFi.

It takes just minutes to get your rate.

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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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Photo credit: iStock/sturti

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