Many people believe they need a 20 percent down payment to buy a house, but it’s possible to purchase even a brand-new house with as little as 3.5 percent down — or even nothing down at all .
In fact, a 2016 survey conducted for Wells Fargo found that 40 percent of U.S. adults held the mistaken belief that a 20 percent down payment was required to buy a home, even though many types of loans allow much smaller down payments, says Ron Sozio, divisional builder sales manager at Wells Fargo in Somerville, N.J.
“The reality is that most of the time you don’t need 20 percent,” Sozio says.
The misperception might be typical of first-time buyers and people who lost their house to foreclosure during the 2008 financial crisis, says Kevin Pearson, president of RMC Mortgage, a Ryland Group subsidiary in Westlake Village, Calif.
“People oftentimes have the assumption that they have to come up with 20 percent down when really as little as 3.5 percent or 5 percent will get you into a home,” Pearson says.
Low down payments aren’t just for resale homes. In fact, the same opportunities exist to buy a newly built home, according to Malcolm Hollensteiner, director of retail lending sales and production at TD Bank in Cherry Hill, N.J.
“If a homeowner is buying a traditional single-family home from a builder, there aren’t any down payment requirement differences than if they were buying an existing house across the street,” Hollensteiner says.
So, what are the minimum down payments?
The minimum down payment required for a conventional loan that conforms to Fannie Mae or Freddie Mac guidelines with a loan amount up to $417,000 is just 5 percent of the house’s purchase price. If the amount is larger than $417,000, the down payment can be as low as 10 percent.
“Most lenders have jumbo loans with a little bit over 10 percent down payment available in the marketplace,” Sozio says.
Even smaller down payments are allowed for conforming loans, like Fannie Mae's 3-percent program , says Ryan Rosenthal, Pacific division builder manager at Prospect Mortgage, a mortgage company in Sherman Oaks, Calif.
The minimum down payment for an FHA loan is just 3.5 percent of the home’s purchase price. That means the down payment for, say, a $250,000 home would be just $8,750 with this type of loan. FHA loans are insured by Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), a federal government agency.
VA and USDA Loans
VA loans, guaranteed by the U.S. Department of Veterans Affairs (VA), and USDA loans, backed by the U.S. Department of Agriculture, don’t require a down payment at all, which means buyers can purchase a house with very little cash up front. The VA loan is open to most active-duty military personnel and U.S. military veterans, among other groups. The USDA loan is available in rural and outlying suburban areas.
Conventional, FHA, VA and USDA loans all allow at least part of the buyer’s down payment to be a gift from a family member or funds from a down payment assistance program. “With FHA, 100 percent of the down payment can come from gift funds, and with the 5 percent down conventional, all 5 percent can be a gift,” Pearson says.
Some builders will allow buyers to save up part of the down payment during the home’s construction if, Sozio says, “they’re pretty close” to the amount they’ll need.
Low-down-payment loans typically involve mortgage insurance or a funding fee. The insurance is paid monthly. The fee is paid upfront, but can be financed as part of the loan amount or through a higher interest rate.
“FHA will always have mortgage insurance. VA will have a funding fee. Conforming loans will have mortgage insurance, until the point that you put down 20 percent. At 80 percent loan-to-value, mortgage insurance is no longer necessary,” Pearson explains.
Without mortgage insurance, lenders wouldn’t be able to offer low-down payment loans and borrowers who don’t have a lot of cash wouldn’t be able to purchase a home.
The down payment requirements for a newly built homes are almost always the same as the requirements for an existing home, but there are two possible exceptions. The first exception is custom-built homes.
Many new construction homes are production houses built in large volume by homebuilding companies. These generally aren’t considered custom homes, even though they come with plenty of personalized options.
A true custom home means the buyers obtained financing to purchase land and hired a builder, and often an architect as well, to construct a home especially for them. In that case, the lender generally will require a larger down payment since the house doesn’t exist yet, Hollensteiner explains.
“With custom homes, when the buyer is responsible for financing the construction costs, buyers typically use a construction-to-permanent, or C2P loan. With the construction-perm program, there is a difference in the down payment (compared with) an already-built home,” he says.
The second exception is newly built condominiums.
Whether a buyer will need a larger or smaller down payment in this situation depends on the lender’s guidelines, type of loan, property location and proportion of units that have been pre-sold during the construction phase.
Rosenthal cites Florida and Las Vegas as two places where lenders might require a larger down payment and higher proportion of presales for a buyer to finance a newly built condo. “It’s a little tougher (to buy with a low down payment) in those markets,” he says.
The bottom line is that most people don’t need a big down payment to buy a house — and some don’t need any down payment at all.
The only way to find out for sure is to talk to a lender. “A lot of people have the income and means to buy a new home and are stuck on the notion, for whatever reason, that they can’t do it,” Pearson says. “I think they’d be surprised that they actually could qualify .”
Marcie Geffner is an award-winning freelance reporter, book editor and blogger whose work has been published by a long list of financial, mortgage and banking websites, trade magazines and newspapers. You can find her on Google+.