We work hard to educate home buyers about the mortgage process, and the different options they have when shopping for a loan. So it’s disturbing to see how many first-time buyers fail to understand basic mortgage concepts, such as down payments and interest rates.
According to a survey conducted by the real estate service Zillow and the research firm Ipsos, 34% of first-time home buyers don’t realize it’s possible to get a mortgage with a down payment below 5%.
So let’s set the record straight right up front: While most conventional loans require down payments of 5% or more, there are a few of options that allow for less money down.
Federal Housing Administration (FHA) loans offer a down payment as low as 3.5%, provided the borrower meets all other program requirements. The “Conventional 97% Mortgage” by Fannie Mae is another low-down-payment option. Members of the military can qualify for 100% financing through the VA loan program. Low-income families in certain rural areas can qualify for 100% financing, through the USDA loan program.
So yes, it’s possible to get a mortgage loan with a down payment below 5%.
FHA Offers Down Payment Below 5%
FHA loans are insured by the government through the Federal Housing Administration, which is part of the Department of Housing and Urban Development (HUD). These loans are popular among first-time buyers because they offer a low down-payment option of 3.5%, provided the borrower has a credit score of 580 or higher.
It’s a common misconception that only first-time buyers can qualify for this program. In fact, anyone who meets the FHA’s basic requirements can get a government-insured loan with a down payment as low as 3.5%. This means the lender is financing 96.5% of the purchase. So this is one way to get a mortgage with a down payment below 5%.
Fannie Mae Conventional 97% Mortgage and HomePath
The FHA option mentioned above is a government-backed home loan. But there are also programs through which borrowers can get a conventional mortgage with less than 5% down. The Fannie Mae conventional 97% mortgage product is an example of this.
This loan product is backed by Fannie Mae, one of the two government-sponsored enterprises (GSEs) that serve as gatekeepers to the secondary mortgage market. This product allows for up to 97% financing from the lender. Conversely, this means borrowers can put down as little as 3% of the purchase price or loan amount.
Additionally, 100% of the down payment can come in the form of a gift from family members. But the gifted funds must truly be a gift. In fact, lenders typically require a letter from the donating family member, explaining that they don’t expect any form of repayment. This product is only available from Fannie Mae.
Fannie Mae also offers a product called the HomePath® Mortgage. It offers 97% financing with no appraisal and no private mortgage insurance (PMI). But borrowers are only eligible for this product if they purchase a Fannie Mae REO / foreclosure property. Lenders typically require excellent credit scores for this program, and they may charge a higher interest rate due to the higher LTV ratio. For a list of eligible properties and additional program details, visit HomePath.com.
According to data from Zillow’s mortgage marketplace, the number of lenders offering quotes with down payments between 3.5% and 5% has increased by 570% over the past two years. The conventional 97% product mentioned above could have something to do with this trend.
Borrowers with limited funds should look into the programs mentioned above, at a minimum. They should also be aware that smaller down payments typically require mortgage insurance. When a single home loan accounts for more than 80% of the purchase price, mortgage insurance will be required. This is an added cost that increases the size of the borrower’s monthly payments.