Mason and Taylor Miranda desperately wanted to buy a house before starting a family. Their apartment was small, it was in an unsafe area, and it just wasn’t a suitable place to welcome their first child.
The only problem? A 20% down payment was way out of reach for the couple. In fact, according to Mason, even a medium-sized down payment would have put them “in a financial pickle.”
“We wouldn’t have much left in the bank for any emergencies or other expenses,” says Mason, a 24-year-old credit industry specialist.
Fortunately, the Mirandas’ lender—M&T Bank—pointed the couple toward an FHA loan, and in June, they bought a $135,000 home in Cicero, New York, with just $5,000 down. It also helped them keep a financial cushion.
“Our home didn’t have appliances when we first bought it,” Mason notes. “The FHA loan allowed us to be able to afford the appliances and fixes immediately with some leftover funds for any other potential problems that popped up.”
The Mirandas’ story is a common one. According to a study from the Urban Institute, more than two-thirds of renters say the down payment is their biggest barrier to homeownership.
Throw in COVID-19 and the economic havoc it has wrought, and the hurdle is now even more insurmountable for many Americans. A recent analysis from Realtor.com even shows the pandemic could delay the average Millennial’s homeownership goals by as much as 53 months—even with aggressive savings efforts.
How big a down payment do I really need?
If waiting almost five-years sounds crazy, a low-down-payment program like the Mirandas used might be the answer. Despite the pandemic and the financial risks it poses, many banks and other lenders are still offering loan programs with minimal down payment requirements—ranging from 3% to 10%, typically. Some require no down payment at all.
Many of these loan programs disappeared after the financial crisis more than a decade ago, but lenders and government agencies have been easing back into these offerings for some time.
For example, Alliant Credit Union’s Advantage Mortgage is one option for buyers without much saved up. The program requires zero down payment, allows for loans up to $500,000, and there’s no mortgage insurance required.
That last detail is important for borrowers considering low- or no-down-payment options.
Though government-backed FHA loans, like the Mirandas’, technically allow for down payments as low as 3.5%, they also require costly mortgage insurance—a policy that protects the lender—both at closing and as part of the monthly payment for the life of the loan. If a buyer puts down less than 20%, most private loans require mortgage insurance, too—though it’s cancelable once they’ve paid down a certain portion of the loan. The exact price of this insurance varies, but according to mortgage purchaser Freddie Mac, it typically costs between $30 and $70 per month for every $100,000 that’s borrowed.
How do I qualify for a low down payment loan?
Programs like Alliant’s don’t require mortgage insurance—or the costs that come with it. What they do require, though? That’d be a high credit score and more cash in the bank.
According to Jerrold Anderson, vice president of residential lending at Alliant, the down payment is just one of the many “standard risk factors” considered by a lender. The others include things like existing debt, credit history and cash reserves.
“If one of the factors is out of range, the other factors are reviewed to determine if they are strong enough to compensate for it,” says Anderson. “In the case of a low down payment, higher credit scores and higher reserves along with a lower debt-to-income ratio would be required to offset the higher risk associated with a low down payment.”
Outside of Alliant, there’s also the NASB Zero Down Home Loan, Bank of America’s Affordable Loan Solution, BBVA’s Home Ownership Made Easier loan and Navy Federal’s Homebuyers Choice loan to name a few. All require low (or no) down payments and have no mortgage insurance requirement.
Still many of these loans demand higher credit scores to account for the extra risk. NASB’s, for example, requires a 720 score. According to FICO, the average American’s credit score is just below that, at 706.
Government-backed FHA loans typically require just a 580 credit score to qualify for the minimal 3.5% down payment. But lenders have upped requirements on these as well. Flagstar, for example, currently asks for a 680 on all FHA loans. According to mortgage technology provider Ellie Mae, the average FICO score of FHA borrowers in June was 684. That’s up from 675 a year ago and the highest average score since early 2017. Some companies, like online lender Better.com, even stopped offering FHA loans altogether, citing economic uncertainty.
“We’re seeing this pullback in terms of the number of low-credit-score and high-loan-to-value products being offered,” says Joel Kan, head of economic and industry forecasting at the Mortgage Bankers Association. “Lenders certainly still have the typical FHA low-down-payment products available, it’s just that within that space, it’s tighter. There are higher requirements than pre-pandemic.”