We’re all about answering reader questions here at HBI. And today, we’ll answer one that has to do with down payments for mortgage loans. A reader recently asked:
Can I buy a house with a 5% down payment?
The short answer is yes, there are many lenders that offer 95% LTV mortgage products. Conventional loans offer down payments as low as 3%, and the FHA program allows you to invest 3.5%. The VA program (for military members and veterans) offers 100% financing.
So yes, it’s entirely possible to buy a house with a 5% down payment. Many mortgage programs support this level of investment, and we’ve covered several of them below.
The Mortgage ‘LTV’ Ratio Defined
We’ll be talking about the “LTV” ratio through the rest of this article. So you should know what that acronym means.
LTV stands for loan-to-value. An LTV ratio is a numerical comparison between the amount of money being given for a loan, and the value of the property being purchased. More simply, LTV is the percentage of the home’s value being mortgaged.
So a 95% LTV mortgage is one that provides funding for 95% of the purchase price / home value. The borrower must then come up with the remaining 5% out of pocket, in the form of a down payment.
Yes, You Could Buy a House With 5% Down
Getting back to the question at hand: Can you buy a home with a 5% down payment?
Absolutely. As long as you meet all of the lender’s other requirements, that is.
When it comes to conventional mortgage loans (those that are not backed by the government), eligible borrowers can put down as little as 3% of the home value.
Fannie Mae and Freddie Mac, the government-supervised corporations that buy loans from lenders, will purchase mortgages with an LTV up to 97%. Conversely, this means borrowers can make a down payment of 3% and still qualify.
Here’s what Freddie Mac says about their Home Possible® mortgage product:
“In addition to its down payment requirement of as little as 3%, Home Possible now offers more options to responsibly increase homeownership for more of your borrowers.”
Fannie Mae, the other government-sponsored enterprise or GSE, offers a similar product called HomeReady®. Here’s what they say about it:
“Home Ready benefits: Low down payment; as little as 3% down for home purchases”
So yes, it’s possible to buy a house with a 5% down payment. You could put even down less than that, if you qualify for one of the two programs mentioned above (or others like them).
If you belong to a credit union, you should find out if they offer mortgage financing. Some credit unions offer programs that allow their members to buy a home with 5% down — or less. Some even offer 100% financing to eligible customers.
Private Mortgage Insurance Is Usually Required
There’s a caveat to all of this. While qualified home buyers can buy a house with a down payment of 5% or less, it usually means paying for mortgage insurance (PMI).
As a general rule, any single mortgage loan that accounts for more than 80% of the home’s value will require PMI coverage.
Granted, it’s not a huge expense. Private mortgage insurance premiums typically range from 0.58% to 1.86% of the original loan amount, per year. Freddie Mac’s website states: “you can expect to pay approximately between $30 and $70 per month for every $100,000 borrowed” for a PMI policy.
With that being said, there are ways to buy a house with a 5% down payment while avoiding the extra cost of PMI. The piggyback strategy is one example. This is when you use two mortgage loans to cover the cost of your purchase, while coming up with 5% out of pocket.
For instance, you could use the 80-15-5 financing strategy to combine or “piggyback” a first and second mortgage. The first loan is for 80% of the home value. The second loan accounts for another 15% of the value. The remaining 5% gets paid by you, the borrower, in the form of a down payment.
FHA Loans Offer 96.5% Financing
Another way to buy a house with less than a 5% down payment is by using the Federal Housing Administration (FHA) loan program.
These mortgages are insured by the federal government through the FHA, which is part of HUD. FHA loans offer more than 95% LTV financing. In fact, you can get up to 96.5% financing when using this program. FHA borrowers are required to put down at least 3.5% of the purchase price.
But here again, you will have to pay mortgage insurance on the loan. The Federal Housing Administration requires both an upfront and annual insurance premium. (Though both can be rolled into the loan.)
The VA loan program is another way to buy a house with little to no down payment. In fact, VA-eligible home buyers can finance 100% of their purchases. But this program is limited to military members, veterans, and certain qualifying spouses.
If you happen to be in the military, a VA loan might be your best option. Otherwise, consider the conventional and FHA loan programs mentioned earlier.
Disclaimers: We work hard to ensure the accuracy of all information presented on this website. But there is still a chance this information will become less accurate over time, as conditions and standards within the lending industry evolve. In other words, don’t take any of this as gospel. Conduct further research.