If you’re scrolling through home listings and dreaming of a place to call your own, you probably know that mortgage lenders traditionally have wanted to see borrowers put down 20% of a home’s purchase price. But what are the benefits and challenges of a down payment that’s less than 20%? And can you purchase a home with a lot less money down (even nothing) in today’s economy?
Learn the answers to these questions and more here. This insight could help you qualify for a mortgage, and ultimately turn your dream house into a reality.
Table of Contents
What Are the Minimum Down Payment Requirements?
Conventional wisdom says you should buy a house with a 20% down payment. But, as noted below, it is indeed possible to buy a home with no money down or considerably less than 20%.
If you don’t qualify for a mortgage with zero money down (some of which are described below), you might find options that will finance your purchase with as little as 3% down. These programs can make you a homeowner that much more quickly. Mortgages like these can be either government-backed or offered by commercial lenders. You may also find offers with 5% or 10% down.
đź’ˇ First time buying a house? Check out these first-time home buyer programs and loans that may help.
When accessing these loans, it’s typically a requirement that you use the home as a primary residence. You may also encounter minimum credit scores to qualify; one in the 500s might qualify you for one program, while a score of 680 or higher could open other opportunities.
Of course, keep in mind that the higher your down payment for a house, the lower your monthly costs will be. But for those who need a boost to enter the ranks of homeownership or have an opportunity to get a dream house before they have saved 20%, these low down-payment options can be invaluable.
FHA Loans: 3.5% – 10% Down
If you need help affording a home but are unable to pull together a hefty down payment, you might want to look into finding down payment assistance programs.
One home loan option is a Federal Housing Administration (FHA) loan. FHA loans are a government program that was initially created to help people buy homes during the Great Depression. It’s still available, and people who can’t afford larger down payments might choose this option.
The FHA doesn’t directly make mortgage loans. Instead, certain lenders offer FHA loans that are backed by a government guarantee. Because of this guarantee, lenders will typically offer more flexible guidelines for mortgage approvals, including the size of the down payment.
In general, if you have a FICO® credit score of 500 to 579, the minimum down payment required for FHA loans is 10%. If your credit score is 580 or above, the minimum down payment is 3.5%.
FHA loans require an annual mortgage insurance premium (MIP) and an upfront MIP of 1.75% of the base loan amount. You’ll typically pay the MIP for as long as you have the loan, unless you make a down payment of at least 10%. If that’s the case, your MIP will be canceled after 11 years.
How much is the MIP? A rate of 0.85% applies to borrowers who put down less than 5% on a 30-year FHA loan for $625,500 or less. You can estimate the upfront and ongoing MIP at the FHA Mortgage Calculator.
VA Loans: 0% Down
If you’re a military veteran, active service member or, in some cases, a surviving military spouse, you may qualify for a U.S Department of Veterans Affairs (VA) mortgage loan without any down payment for a house required.
This program was created by the U.S. government in 1944 to help people returning from military service purchase homes.
Monthly mortgage insurance is not required, but a one-time funding fee is for some borrowers. For a first VA-backed purchase or construction loan, the fee is 2.3% of the total loan amount if you put less than 5% down. It’s 1.65% of the loan amount if you put 5% to 10% down.
Conventional Loans
Some private lenders provide conventional loans for homebuyers with less than 20% down. Almost always, in these cases, you’ll need to purchase private mortgage insurance (PMI) that insures the lender.
PMI adds a fee to the monthly mortgage payment.
PMI can be, on average, an annual 0.22% to 2.25% of the total loan amount, with the premium amount depending on the type of mortgage you get, your down payment, your credit score, and loan term. It also depends on the amount of PMI that’s required by your loan program or lender.
Borrowers usually choose to pay PMI monthly, and it is included in the monthly mortgage payment. Expect to pay about $30 to $70 per month for every $100,000 borrowed, Freddie Mac says.
You can ask to get rid of PMI after you accumulate 20% equity and have a good payment record, there are no liens on the property, and the value has not declined. (PMI usually must end once you have 22% equity in your home, based on the original purchase price, if you’re up to date on payments.)
You may also be able to get rid of PMI if your home’s value rises enough to give you 25% equity and you’ve paid PMI for at least two years.
This applies to borrower-paid mortgage insurance. You can’t cancel lender-paid mortgage insurance when your equity reaches 78% because it is built into the loan.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Can You Buy a House Without a Down Payment?
The truth is, when on the path to become a homeowner, you can get started with little or zero money down. If you want to get a mortgage with no money down, a government-back loan is likely your best bet.
These loans are insured by our federal government, so your mortgage lender doesn’t assume the risk of loaning money to someone who might default. They know Uncle Sam is standing behind the loan. These mortgages can be a win-win. They encourage citizens to become homeowners even if they don’t have a down payment, and they make banks more likely to lend under these no-down-payment conditions.
You’ll learn more about the different programs available below.
đź’ˇ Recommended: How to Afford a Down Payment on Your First Home
How Much You Put Down Depends on Your Budget
The question of how much should you put down on a house is really a subset of a bigger home-buying question: whether the house you want is within your budget.
Figuring Out Your House Budget
Many house hunters use a popular formula to determine how much to spend. They take their household gross annual income (before taxes) and multiply it by 2.5. They could also use a home affordability calculator to get a more precise estimation. That would be the most, they decide, they can afford on a house.
So, if your household income is $150,000, the maximum purchase price, using this formula, would be $375,000. Note that this isn’t a formula used by a lender; it’s a general rule of thumb that people use.
| Household Gross Income (before taxes) | Home Price They Can Afford |
|---|---|
| $150,000 | $375,000 |
| *Based on formula: Gross household income * 2.5 | |
A lender often wants your total housing expense — monthly principal, interest, property taxes, and insurance, plus any homeowners association fee or private mortgage insurance — to be, at most, 28% of your gross monthly income.
So, using the figure of $150,000, that would equal a maximum housing expense of $3,500 per month ($150,000/12 x 28%).
| Household Gross Income (before taxes) | Max Housing Expense |
|---|---|
| $150,000 | $3,500 per month |
| *Based on formula: Gross household income * 28% | |
Your estimated housing payment will depend on how much of a down payment is applied. Let’s say the house you want costs $329,000. (If you’re interested in how that compares to current costs, know that according to the Federal Reserve Bank of St. Louis, the median house price in early 2022 was $428,700, which reflects an increase of 30% versus 2020 figures.)
If you were to finance the $329,000 home, you’d need $65,800, plus closing costs, to swing a 20% down deal. So the first question is whether you have or can get those funds easily enough.
| Home Price | Percent Down | Estimated Down Payment |
|---|---|---|
| $329,000 | 20% | $65,800 |
If the answer is “yes,” then you can check your income against the formulas provided to see if it all works out according to plan.
What if you don’t have that kind of cash for the down payment? If you could afford a smaller down payment plus closing costs and still meet the income requirements, your next step would be to see which lenders offer home loans with that kind of program.
Mortgages generally fall into two categories: loans that are insured or guaranteed by the government, and loans not insured or guaranteed by the government, which are called conventional loans.
Government-backed mortgages are often easier to qualify for than conventional mortgages.
Estimate Your Monthly House Payment
Use the calculator below to test different down payment amounts and see how they would change the estimated mortgage payment.
How Big Should Your Down Payment Be?
The average down payment falls below 20%, so if you can’t cough up 20%, you’re in good company. In fact, the median down payment for many homebuyers is currently 12%.
In general, it makes sense to put down as much as you can comfortably afford. The more you put down, the less you’ll be borrowing, which translates into more equity in the house and lower monthly payments. Plus, with a lower mortgage amount, you’ll pay back less interest over the life of the loan.
On the other hand, it doesn’t always make sense to empty the bank in order to put down the largest down payment possible. That’s because you’ll likely have moving expenses, plus you’ll need to pay closing costs, which can vary by purchase price, state in which the property is located, interest rate chosen, lender processing fees, and more.
Furthermore, the home you’re moving into may need cosmetic repairs, or you may want to redecorate, add new landscaping, and so forth. Plus, you’ll probably want to keep an emergency fund to pay for unexpected costs.
If this doesn’t all seem doable, you may want to look for a more affordable house for now and save up for your dream house. Or, if you can wait a while before buying, then you can create a savings plan to build up a down payment.
Tips to Help You Save for a Down Payment
For 58% of recent buyers, their down payment came from savings (a fortunate 10% of buyers used a gift from a friend or relative toward the down payment), according to a 2021 National Association of Realtors® report.
Saving can be difficult, to be sure. In the Realtors® report, nearly half of respondents who said that saving for a down payment was difficult attributed the struggle to student loans, and 36% to credit card debt.
But if you are ready to be a homeowner, now is the time to get serious about saving.
Here are steps to consider taking:
1. Track your spending, including fixed expenses (rent, utilities, car payments, and so forth) and variable ones (like dining out, clothes shopping, and hobbies). Add expenses that you pay annually or semiannually, breaking those down into monthly amounts.
2. Make a budget that helps you to trim unnecessary expenses. (As you do this, you might consider if it makes sense to refinance student loans or consolidate credit card debt into a personal loan?)
3. Brainstorm ways to boost your income. Asking for a raise may be an option, or you might start a side hustle to bring in additional cash.
4. Figure out what you can save each month, both for your down payment and to build up how much you should have in your emergency fund.
5. Set a timetable for your plan.
đź’ˇ Recommended: First-Time Homebuyer’s Guide
The Takeaway
If you can manage a down payment but it’s south of 20%, know that you’re in good company. Finding a mortgage with less than 20% down is often doable, though fees usually come along for the ride.
Still, if you’d like to hear the jingle of house keys instead of apartment keys in your pocket, give SoFi mortgage loans a look.
SoFi offers a range of mortgage loans with as little as 3% to 5% down. And you can get prequalified with no obligation.
Ready to get started? It’s easy to check your rate.
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