The Myth of the 20% Down Payment

How much do you really need to put down when buying a home?

House sitting on pile of dollar bills
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Many people believe that buying a home is out of reach, as it would take years to save the recommended 20% for the down payment. However, you can buy a home without having 20% to put down. Your down payment can come from bank accounts, stocks or mutual funds, an inheritance or a gift from a family member and even a retirement portfolio. Requirements vary based on loan type and homebuyers purchasing a primary residence will always have lower down payment requirements than an investor or second home buyer.

FHA: Federal Housing Administration

FHA loans have been popular with buyers for almost 80 years since they launched in 1934. Requiring a scant 3.5% down and boasting some of the best “Second Chance” underwriting guidelines available in 2015, FHA continues to be a mortgage financing mainstay.

VA: Veterans Department

Introduced as a reward and incentive for service to our country; VA mortgage financing has also served America. In 2012, the Department of Veterans Affairs announced it has guaranteed $20 million in home loans since its home loan program was established in 1944 as part of the original GI Bill of Rights for returning World War II Veterans.

To be eligible for a VA loan, you must have served in the U.S. Armed Forces, or have been a member of the National Guard or Reserves. In some cases, spouses of deceased veterans are eligible as well. VA underwriting is very similar to FHA underwriting in terms of leniency.

USDA: US Department of Agriculture

Dubbed the “Farmer’s Loan” and funded by the USDA, the United States Department of Agriculture, this rural housing incentive is available to much of small-town America.

Offering a low interest, low down payment mortgage option for low to middle-income families, USDA financing can present one of the best mortgage bargains available in the market.

There are geographic requirements for the property itself, and a lender can definitely help you figure out if your dream home qualifies for this program. The USDA program is commonly used in towns with a population of 25,000 or less.

Conventional 3% Down Program

The once dormant Fannie Mae 97% loan-to-value program has arisen from the ashes as of December 2014. Thankfully, the Federal Housing Finance Authority (FHFA) who controls Fannie and Freddie, realized that many millennials were staying on the home buying bench due to lack of assets.

They also found FHA financing pricier than they prefer and lacked a reasonable conventional mortgage alternative. As it happens young people in the millennial demographic had a hard time saving during the Great Recession. Being under-employed and underpaid makes it difficult to save thousands to put towards a down payment.

It does not, however, indicate that savings-challenged millennials are a greater credit risk. In fact, many have impeccable credit that often works in combination with upward job mobility potential to make them a very low credit risk.

The conventional 3% down mortgage is a solid option to FHA financing. The 3% down payment program is limited to loan sizes of $424,100 or less. Loans in high-cost areas are permitted, but loan sizes remain capped at local conforming loan limits.

State and Local Assistance Programs

Every state has at least one home-buyer assistance program, most have multiple options. The majority of the programs available from state housing and finance agencies are geared to low and middle-income buyers.

However, there are also programs designed to stimulate neighborhoods or incentive buyers who serve the community as a firefighter, policeman, social worker or teacher. Individual communities and even neighborhoods allocate funding toward housing assistance and neighborhood revitalization too.

It pays to check HUD’s advice on buying a home, in addition to researching your official county and city government sites for local incentives.