How to Afford a Home Without a 20% Down Payment

For decades, the 20% down payment has been held as the gold standard for homebuying. While it's true that a larger down payment has benefits—like lower monthly payments and no private mortgage insurance (PMI)—saving that much cash is a significant barrier for many aspiring homeowners.

The good news? You don't always need 20% down. In fact, a wide variety of loan programs and strategies exist to help you purchase a home with a much smaller initial investment. Let's explore your options.

1. Government-Backed Loan Programs

FHA Loans

Backed by the Federal Housing Administration, FHA loans are one of the most popular choices for low-down-payment home buying.

• Down Payment: As low as 3.5% with a credit score of 580 or higher.
• Credit Requirements: More flexible than conventional loans. Borrowers with credit scores as low as 500 may qualify (with a 10% down payment).
• Key Consideration: You'll pay an Upfront Mortgage Insurance Premium (UFMIP) and an annual MIP (Mortgage Insurance Premium) for the life of the loan in most cases.

VA Loans

Available to active-duty service members, veterans, and eligible surviving spouses.

• Down Payment: 0% down. Yes, you read that correctly.
• Credit Requirements: Varies by lender but generally flexible.
• Key Consideration: No down payment and no PMI. There is a one-time VA Funding Fee, which can be rolled into the loan.

USDA Loans

Backed by the U.S. Department of Agriculture, these loans are for homes in designated rural and suburban areas.

• Down Payment: 0% down.
• Credit & Income Requirements: Borrowers must meet income eligibility limits for their area and demonstrate a stable income history.
• Key Consideration: The property must be located in a USDA-eligible area. There is an upfront guarantee fee and an annual fee.

2. Conventional Loan Options

Conventional 97 Loans

These are standard conventional loans that require only a 3% down payment.

• Down Payment: As low as 3%.
• Credit Requirements: Typically requires a credit score of 620 or higher.
• Key Consideration: You will be required to pay for PMI until you reach 20% equity in the home.

HomeReady® and Home Possible® Loans

These are special conventional loan programs sponsored by Fannie Mae and Freddie Mac, designed for low-to-moderate-income borrowers.

• Down Payment: As low as 3%.
• Credit Requirements: Flexible, often accepting non-traditional credit history.
• Key Benefit: They offer reduced PMI costs and allow for income from non-borrowing household members to help qualify.

3. Down Payment Assistance (DPA) Programs

Many state and local governments, as well as non-profits, offer down payment assistance. These can come in several forms:

• Grants: Money that does not need to be repaid.
• Forgivable Loans: A second loan that is forgiven after you live in the home for a set number of years (e.g., 5 years).
• Deferred-Payment Loans: A second loan with no payments due until you sell the home, refinance, or pay off the mortgage.
• Matched Savings Programs: Programs like Individual Development Accounts (IDAs) that match the funds you save for a down payment.

4. Other Creative Strategies

Gift Funds

Family members can gift you money for your down payment. You will need to provide a gift letter to your lender stating the amount, the donor's relationship to you, that it is a true gift (not a loan), and the donor's information.

Seller Concessions

In some markets, you can negotiate for the seller to pay a portion of your closing costs. This frees up more of your own cash to put toward the down payment.

Piggyback Loans (80-10-10)

This strategy involves taking out two loans simultaneously:

1. A first mortgage for 80% of the home's price.
2. A second mortgage (like a home equity line of credit) for 10%.
3. You provide a 10% down payment.

This structure allows you to avoid PMI without putting a full 20% down.