Can You Buy a House Without a 20% Down Payment?

The typical first time home buyer in America can spend years trying to save that all-important down payment. Not least because we’re told we need a minimum of 20% of our home’s purchase price. With the median home price sitting at around a million dollars in some major cities, that’s a pretty significant sum we’re looking at.

You don’t, as many buyers will tell you, actually need that 20% down payment, and some people would never get on the property ladder if they did. There is, however, a reason it’s often quoted. It’s around where many commercial lenders will want you to be before they offer you a mortgage, and if you have less than that as a down payment you may have to pay for private mortgage insurance, which can add yet another fee to your monthly house expenses.

There are, however, various grants and programs available to first-time home buyers, depending on where you are buying, your circumstances and your credit score. As of 2023, here is an idea of what’s available.

The FHFA First-Time Home Buyer Mortgage Rate Discount

The Federal Housing Finance Agency (FHFA) now offers discounts on the interest rates paid by first-time home buyers. The deal is available to lower income buyers, depending on a few other factors.

You’ll need to prove you’re a first-time home buyer and that your income is on a par with, or below, the typical household income in the area you’re buying in. You’ll also need to use a conventional fixed-rate mortgage with a 30-year term.

You can expect a discount on your fixed mortgage rate of up to 1.75 percentage points, which may not sound like much. However, it can reduce your monthly mortgage payments by as much as 20%. The discount you’re offered will be based on your credit score, the size of your down payment, and other details such as the type of property you’re buying.

New FHFA rules also mean that lenders will be able to use updated models for assessing buyers’ creditworthiness.  The new models are supposedly more inclusive than the traditional FICO credit scoring method. For example, they can include factors such as rent and utility payments history: things that demonstrate a buyer’s ability to manage finances, but that have not usually been considered by lenders.

FHA Mortgage

The Federal Housing Administration (FHA) loan is also designed to help those on a low or moderate income buy a home. While FHA loans are not only available to first-time buyers, they are particularly popular those buying their first home.

The program offers a conventional mortgage loan for residential properties, including multi-unit properties, with a required down payment as low as  3.5% of the purchase price. It is generally available to those with a 580 FICO score, although exceptions are made for those with a lower credit score, and even those who lack standard credit history, depending on their circumstances.

The federal government insures FHA loans, and many will find they are the most affordable option overall, although because they tend to go to more high-risk borrowers, interest rates will be higher, and private mortgage insurance is often required.

USDA Mortgage

The USDA mortgage is backed by the U.S. Department of Agriculture, and is offered on homes in rural communities. The loan can be up to 100% of the purchase price, allowing those with no down payment at all to secure a mortgage. For young people in rural communities, who want to stay in those areas, but have had little opportunity to save a down payment, a USDA loan may be worth considering.

The Section 502 Guaranteed Loan program is aimed at those on a moderate income, whereas the Section 502 Direct Loan program assists those on low and very low incomes. You can check your eligibility for assistance, and find out if a specific property is located in an eligible rural area, on the USDA website.

VA Mortgage

If you or your spouse is a military veteran or an active duty member of the military, you may qualify for a VA mortgage. This one offers 100% of the property value and is backed by the Department of Veterans Affairs, to enable current and previous members of the armed services to buy a home. It is also available to some surviving spouses of members of the military.

A VA loan is not available automatically. It still requires a good credit score: generally a minimum of 620. However you won’t need mortgage insurance, even if you have a low (or no) down payment. Eligible buyers can use VA loans to purchase residential properties in all 50 states and US territories. Unlike some other options in this list, you’ll often find that VA mortgage rates are lower than you’d be offered on a comparable conventional mortgage.

HomeReady

HomeReady is a program administered by Fannie Mae, that offers reduced mortgage rates and costs to “credit-worthy low-income borrowers”. The program requires a minimum FICO score of 620, and offers home loans based on a 3% down payment. It can apply to both first-time and repeat buyers and may be available for those looking to re-finance an existing home, as well as those buying a new one.

Buyers who use HomeReady may be eligible for help with closing costs, but will generally be required to take out mortgage insurance, and may have to take homeownership education in order to secure the loan. There are no restrictions on where you can buy.

Home Possible

Home Possible is similar to HomeReady, but is administered by Freddie Mac. They offer a loan based on a 3% down payment aimed at for low and moderate-income home buyers. The borrowers annual income must be at or below the median income for the area they are buying in, with some exceptions for designated high-cost areas. Home Possible mortgages are available as fixed-rate or adjustable-rate loans.

The program requires a 660 minimum FICO score for purchases, and will consider no cash-out refinancing for those with a minimum score of 680. Loans may be available for those with no standard credit history, depending on individual circumstances.

Conventional 97

Conventional 97 is an alternative program aimed at home buyers whose income is too high to qualify for HomeReady or Home Possible. It is available with a 3% down payment, and is a  conventional, 30-year, fixed-rate mortgage for single-family homes. It requires a minimum FICO score of 620. The loan program can finance a single-family home or condo unit, and the buyer must be planning to use the home as a primary residence only.

The Good Neighbor Next Door Program

Administered by the US Department of Housing and Urban Development (HUD), this program is aimed at potential home buyers in certain professions, such as law enforcement officers, K-12 teachers, firefighters and emergency medical technicians. The program essentially sells repossessed homes to first-time buyers at 50% lower than the market price. Buyers must commit to living in the property for at least three years, as their sole residence.

State, Regional, and Community Initiatives

There are various state, regional and community initiatives available that assist first-time home buyers. They include down payment loans and grants and assistance programs that help with closing costs and other fees. They’re generally aimed at those on a lower income and may only be available to those buying in specific areas.

Check with your municipal government housing administration to find out what’s available. The National Council of State Housing Agencies website can also help you find your local State Housing Finance Agency (HFA) which may offer help with purchasing or developing a home in your area, if you are on a low income.

Should You Just Wait Until You Have the 20% Down Payment?

If all this seems complicated, then waiting until you have the down payment may be tempting, and it might be the right thing for you to do. In fact, not buying a home at all might be the best choice for you, depending on your circumstances. Before buying always consider:

• The location commitment – if you are likely to move around for work or other reasons, buying might not be right for you, especially if you have to commit to using the home as your primary or sole residence.
• All the costs – from the mortgage to the insurance (including mortgage insurance), closing costs and all the other fees involved in buying and maintaining a home. On paper, it can often look like a mortgage is cheaper than rent, but factor in the other costs of ownership, and it rarely is.
• The opportunity costs – People will tell you your house is an investment and an appreciating asset. Sometimes it is, but the money you put into it is no longer available to invest elsewhere, and a home doesn’t always provide a good ROI.

There are pros and cons to homeownership, and a lot to consider before you decide whether it’s right for you. If it is, and you don’t happen to have that 20% down payment saved up, you’ll want to consider the benefits, and drawbacks, of all the options you might be eligible for before making a final decision.

Karen Banes is a freelance writer specializing in entrepreneurship, parenting and lifestyle. She writes articles, website content, ebooks and the occasional award winning short story. Her work has appeared in a range of publications both online and off, including The Washington Post, Life Info Magazine, Transitions Abroad, Brave New Traveler, Natural Parenting Group, and Copia Magazine. Learn More About Karen