Can’t afford 20% down? Here’s how you can still buy.

Looking to purchase a home, but weary about the down payment? 
If 20% is too steep for your wallet, check out these savvy workarounds. 

When you get serious about buying a home, one of the first things you’ll have to consider is the down payment. For many years, lenders set the standard at 20%. Putting down this amount shows you are financially ready, lowers your monthly mortgage payment, and eliminates the need for insurance. Makes perfect sense! 

But when you start to crunch the numbers, things can get scary. Let’s put this into perspective. 

While most of our clients are paying well over $1M for their homes, it may surprise you that in 2023, the median home sale price in the state of New York was only $490,000. This brings the hypothetical buyer’s 20% down payment to a comfortable $98,000. When the numbers go way higher, though, it’s easy to see why the typical borrower would have a hard time coming up with such a sizable sum.

The 20% rule also explains why many hopeful homebuyers are unable to pull the trigger (even when they can realistically afford the monthly mortgage payment). 

So, what’s a borrower to do? Let Everest lead the way. 

Do I need to put down 20%? 

If that upfront payment is the root cause of your worries, working with an experienced mortgage professional is an excellent way to take away the stress and learn about your options. 

The reality is, putting down 20% has its benefits, but it’s not the ONLY way. 

“For instance, HomePossible and HomeReady are Freddie Mac and Fannie Mae loans that allow 3% down with certain income restrictions,” says Kim Donnelly, Senior Loan Officer at Everest Equity. “Another option, the HomeOne mortgage, does not have an income restriction, but you do need to be a first-time homebuyer.”

There are also other low down payment loans available. 

Mrs. Donnelly explains, “Someone purchasing a single-family home that is not a first-time homebuyer and exceeds the income limit for HomePossible and HomeReady can put down as little as 5%. Likewise, anyone purchasing a multi-family property that is going to live in one of the units can also put down as little as 5%. However, if the owner does not intend to live on site, they will need 15% down.” 

For those strapped for cash, seeing such small percentages is promising. 

Still, it’s important to remember that banks require private mortgage insurance (PMI) if more than 80% of your home cost is financed. This fee is added to your monthly payment as a safeguard against default. The good news is, you can request to have the PMI removed once you acquire 80% equity, but this only applies to conventional loans. 

“You have to reach 80% loan-to-value organically in order to remove the PMI,” notes Mrs. Donnelly. “But the reality is, there are other ways to reduce your monthly payment. Most people work with a loan officer to refinance well before this point.” 

For many buyers, paying a lower down payment and taking on PMI is worth the cost. Without this option, they may never have the opportunity to become homeowners. 

Now, you might be wondering—how much will private insurance set me back? PMI is based on a number of factors including the size of your loan, the amount you put down, as well as your personal finances. 

“The PMI amount is largely driven by your credit score. It’s significantly less with higher scores and can be high with lower scores,” says Mrs. Donnelly. “When dealing with lower credit scores, I usually advise clients that FHA would be the better option for them.” 

FHA: a little help from the Feds

The Federal Housing Administration (FHA) also steps in to help Americans on their quests for homeownership. Government-backed loans require a down payment of only 3.5% for primary residences. To qualify, borrowers must have decent credit scores, but in some cases, the FHA will accept people with lower scores if they don’t quite meet the conventional requirements. People who take on this type of mortgage must also pay for insurance. 

Mrs. Donnelly explains, “FHA loans require an upfront mortgage insurance premium known as MIP (mortgage insurance premium). Unlike conventional, this fee is not affected by credit scores. Rather, it’s a standard premium for conforming 30-year fixed mortgages. For this reason, FHA is sometimes a better option for buyers with lower credit scores.” 

In general, paying for insurance can be a valuable tool in the mortgage process. For instance, there are scenarios when buyers have enough to put down 20%, but it might make more sense for them to leave a little money in their pocket.
 

“For clients with higher credit scores, PMI can be minimal,” says Mrs. Donnelly. “Also, most people don’t realize the more you put down, the lower your PMI will be on a conventional mortgage. But with an FHA loan, MIP remains the same no matter how much you put down.” 

It should be noted that MIP stays for the life of the loan if you put down less than 10%. But if you make a down payment of 10% or more, the premium can be removed after 11 years.

How else can I make my dream come true? 

While your loan officer can advise you of the many mortgage products available, there are some other ways to make your move without the customary 20%. 

Gifts

If you’re a buyer with well-off relatives, financial gifts can be a great way to work around the down payment problem. Of course, certain rules apply. Generally speaking, lenders allow borrowers to use financial gifts for down payments, closing costs, as well as reserves to put toward the monthly mortgage. But Mrs. Donnelly advises—the money must come from a family member or romantic partner. 

“Furthermore, if you happen to be purchasing a home from a relative, they can give you a gift of equity, which can be far more beneficial than reducing the price,” she says. “I just advised one of my clients that recently closed to choose the gift of equity in lieu of a price reduction. They were able to get into the home with no money out of pocket and the seller (a parent) got the price they wanted. A total win-win scenario for everyone!” 

VA Loans

In this case, the down payment isn’t even a factor! If you or your spouse served in the military, you may be eligible for a Veterans Affairs (VA) loan. Unlike Uncle Sam’s FHA loans, this super flexible product requires neither mortgage insurance nor a down payment. 

Per Mrs. Donnelly: “For qualifying veterans, the VA loan is 100% financing.” 

Buyers must submit a certificate of eligibility verifying their active duty during wartime, years of service, widow/widower status, among other factors. 

USDA Rural Development Loans

The United States Department of Agriculture (USDA) also issues flexible mortgage options for homebuyers who qualify as low or moderate income, which varies depending on where you reside. Most eligible properties are in rural areas, but always check the address, as many locations are covered. 

The best part? Like VA, USDA loans make homeownership affordable by eliminating the down payment requirement. 

Mrs. Donnelly notes, “USDA loans also allow 100% financing with 0% money down.”

No matter which mortgage best fits your situation, happy house hunting from Everest Equity! 

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