Can I buy a home with less than 10% down? This is a common question among home buyers, especially first-time buyers who have limited funds saved up.
The short answer is yes, it’s possible to buy a home with less than 10% down. In fact, the median down payment in 2017 was 5% for home purchase loans, according to the Urban Institute. Some loan programs only require an investment of 3%.
Buying a Home with Less Than 10% down
There is a widespread misconception out there that says home buyers have to put down at least 20% when buying a house. But these days, that’s not accurate.
The 20% figure is often used as a benchmark for down payments because it allows the borrower to avoid paying private mortgage insurance (PMI). When the loan-to-value ratio (LTV) rises above 80%, mortgage insurance is usually required. That’s why some people choose to put down 20% or more when buying a house. They do it to avoid PMI.
But there is no industry-wide rule or requirement that says home buyers have to put 20% down on a purchase. In fact, there’s no standard for a 10% down payment either. So it is entirely possible to buy a house with less than 10% down these days. And there’s plenty of evidence to support this notion.
The typical down payment for a home purchase in the U.S. has actually dropped over the past few years. This is the result of more loan programs coming onto the market, among other factors.
According to the Urban Institute, a nonprofit research organization:
“The median down payment has decreased significantly since the housing boom. It was 20 percent in 2006 but was just 5 percent for purchase mortgages in 2017.”
Flexible Mortgage Programs Worth Exploring
As mentioned above, there are several mortgage loan programs that allow borrowers to buy a house with less than 10% down. Here’s a quick rundown on those financing options:
FHA. The Federal Housing Administration (FHA) mortgage insurance program allows the borrower to finance up to 96.5% of the home’s value. This means that the home buyer can purchase a home with a down payment as low as 3.5%. To qualify for this option, borrowers must have a credit score of 580 or higher as per HUD guidelines.
Conventional. By definition, a “conventional” mortgage loan is one that is not insured by the federal government. That makes it different from the FHA program mentioned above. Fannie Mae and Freddie Mac, the government-sponsored corporations that purchase conventional loans from lenders, will buy mortgage products with loan-to-value ratios up to 97%. That means borrowers who use these programs can buy a house with as little as 3% down.
VA. Most military members and veterans in the U.S. can qualify for the Department of Veterans Affairs (VA) home loan program. This unique program offers mortgage financing up to 100%. That means the borrower can buy a house with no down payment whatsoever.
USDA. The U.S. Department of Agriculture offers home loan program for borrowers in rural areas who meet certain income requirements. Like the VA program mentioned above, it too offers financing of up to 100% for eligible applicants.
As you can see, there are several ways to buy a home with less than 10% down.
Using Gift Money from a Family Member
Most loan programs available today allow the home buyer to use money from an approved third party, to help cover the down payment expense. This is true for both FHA and conventional mortgage products. This is another way for borrowers to reduce their upfront, out-of-pocket expense.
The rules and requirements for these down payment “gifts” can vary from one loan program to the next. Generally speaking, the donor has to be a family member or close friend. The money could also come from an employer or a non-profit group — again, depending on the specifics of the program.
It’s important to realize is that if you buy a home with less than 10% down, you’ll probably have to pay mortgage insurance in some form. It’s usually required when the LTV rises above 80%. But for many people, the cost of mortgage insurance is a small price to pay because it allows them to buy a home sooner and with less money down.