If there’s one thing that holds many potential homebuyers back from buying a home, it’s the down payment or lack thereof. It’s hard to save money while paying rent and dealing with the standard cost of living. Many people avoid buying a house because they don’t have the standard 20% down payment that they assume that they need.
In reality, this isn’t the case. Even conventional loans don’t require a 20% down payment. Keep reading to learn the minimum down payment for each program to see which one you may qualify for after all.
Conventional Loan Down Payment Requirements
Conventional loans carry the myth that you need to put 20% down on them, but you don’t. You can get away with a down payment as low as 5%. Let’s look at how different that looks.
Let’s say you want to buy a home for $200,000. If you abided by the 20% rule, you would need $40,000 for the down payment. If you put down the minimum down payment, though, you’d only need a down payment of $10,000. That’s a difference of $30,000 and probably many years of saving for a down payment.
Conventional loans do require you to pay Private Mortgage Insurance if you do put less than 20% down on the home, though. This shouldn’t be a deal breaker though. PMI is insurance that protects the lender as long as you owe more than 80% of the home’s value. Once you owe less than 80% of the home’s value, though, you can have the lender eliminate the PMI from your loan without requiring you to refinance the loan.
Conventional loans do have stricter guidelines than other loan programs. You will need:
- 680 credit score or higher
- 28% housing ratio (your mortgage payment can’t exceed 28% of your gross monthly income)
- 36% total debt ratio (your total mortgage payment can’t exceed 36% of your gross monthly income)
- Stable employment and income
- FHA Loan Down Payment Requirements
FHA loans require an even lower down payment. You can put down as little as 3.5% of the home’s purchase price and get an FHA loan. This could save you 1.5% compared to the conventional loan. FHA loans do charge mortgage insurance on your loan as well. The difference with FHA loans, though, is that they charge you mortgage insurance no matter how big or small your down payment is on the home.
FHA mortgage insurance also lasts for the life of the loan. Unlike conventional loans, you can’t get it eliminated. As long as you have the FHA loan, you pay the mortgage insurance. The only way to eliminate it is to refinance the loan into a conventional loan once you owe less than 80% of the home’s value.
The FHA loan has more flexible guidelines than the conventional loan:
- 580 credit score
- 31% housing ratio
- 41% total debt ratio
- Stable income and employment
- Proof that you’ll live in the home as your primary residence
- No defaulted federal debt
The FHA also has one exception to the credit score rule. You may be able to get away with a credit score as low as 500 (if you can find a willing lender). The difference is that you will have to make a minimum down payment of at least 10% if you have a credit score lower than 580.
VA Loan Down Payment Requirements
If you are a veteran of the military, you have the good fortune of securing the VA loan. You need to prove that you are entitled to this benefit by providing your Certificate of Entitlement. You can obtain this if you have served at least 90 days during wartime or 181 days during non-wartime. If you served in the National Guard or Reserves, you must serve at least 6 years. No matter your branch of the military, you must also have an honorable discharge.
If you are eligible for the VA loan, you don’t need a down payment. You can get a 100% loan. This makes it much easier for veterans to become homeowners. The VA is able to offer this option because they guaranty the loans. In other words, they back the lenders up if you default. The VA will pay the lender back 25% of the amount that they lost.
VA loans don’t require mortgage insurance. You do pay an upfront funding fee equal to 2.15% of your loan amount for regular military members and 2.4% for members of the National Guard or Reserves.
VA loans also have flexible guidelines:
- Minimum 620 credit score
- Maximum 43% total debt ratio
- Enough disposable income to meet the requirements for your area and family size
- Proof that you will live in the home as your primary residence
- No defaulted federal loans
USDA Loan Down Payment Requirements
USDA loans are another 0% down payment option. In order to be eligible for the program, you must purchase property in a rural area according to the USDA standards. You must also have a total household income that is equal to or less than 115% of the average for the area.
If you are eligible, you won’t need a down payment for the USDA loan. You can borrow 100% of the home’s purchase price as long as it’s a modest home for the area. The USDA does charge both upfront and annual mortgage insurance. You pay the annual mortgage insurance for the life of the loan, as you do for the FHA loan. The only way to cancel it is to refinance the loan into a conventional loan.
In order to qualify for a USDA loan, you must:
- Have a 640 credit score or higher
- Have a maximum 29% housing ratio
- Have a maximum 41% total debt ratio
- Prove that you will live in the home as your primary residence
- No defaulted federal loans
As you can see, you have many options for loans even when you don’t have a 20% down payment. Explore your options and see which loan will work the best for you to become a homeowner.
Meta Description: You don’t need a 20% down payment for most loan programs today. Learn the lowest amount you can put down for each of the loan programs today.