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First time home buyer down payments start at just 3%

Gina Pogol
The Mortgage Reports contributor

First time home buyers don’t need a huge down payment

First time home buyers get access to many low-down-payment mortgages. For example, conventional loans let you buy a house with 3% down and a 620 credit score, and FHA loans allow a 3.5% down payment with credit as low as 580.

There are even mortgages for first time home buyers with 0% down. The two most common are USDA and VA loans. However, these both have special requirements, so not everyone will qualify. 

Even if you can’t get a zero-down loan as a first time home buyer, there’s a good chance you’ll qualify with just 3% or 3.5% down. 

Check your options to see what you can afford right now. 

Verify your homebuying eligibility (Jul 10th, 2020)

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What is a down payment?

If you can’t or don’t want to buy a house with cash, you need financing — a mortgage.

Sometimes, a bank will lend you the entire amount you need to buy a home. This is known as 100% financing.

However, most mortgages require some contribution from the borrower. This contribution — what you put toward the house out of pocket — is called a “down payment.”

For example, if you purchase a home for $100,000 and borrow $90,000 (90%), you would put $10,000 down on the house. That’s a 10% down payment.

Can you afford a down payment right now? 

First time home buyers often overestimate how much they need for a down payment. Consider the FHA loan, a popular mortgage for first time home buyers that only requires 3.5% down. On a $250,000 house, that’s an $8,750 down payment — almost exactly equal to the amount an average American has in their savings account: $8,863

FHA loans aren’t the only first-time home buyer loan with a low down payment, either. All of the following loans let first time home buyers put 5% down or less:

Of course, you might decide to put down more or less than the required down payment for your home, depending on what your financial goals are. 

But if your main goal is to become a homeowner in the near future, one of these loans could help you achieve that dream sooner than you thought. 

Verify your homebuying eligibility (Jul 10th, 2020)

How much do first time home buyers have to put down?

There are certain loans that let home buyers put zero percent down. But these are harder to qualify for than most mortgage types. So realistically, most first time home buyers have to put down at least 3% of the home’s purchase price for a conventional loan, or 3.5% for an FHA loan

Imagine you want to buy a $250,000 house. Here’s of how much you might have to put down as a first time home buyer, depending on your qualifications: 

Credit Score Debt-to-Income Ratio Loan Type  Down Payment Down Payment $ Amount
500-580 40-50% FHA Loan 3.5% $8,750
630+ Up to 43% Conventional Loan 3% $7,500
620+ Up to 41% VA Loan 0% $0
640+ Up to 41% USDA Loan 0% $0

To qualify for one of those zero-down first time home buyer loans, you have to meet special requirements.

For a VA loan, you need to be an eligible U.S. Armed Forces veteran or service member.

And to get a USDA loan, you need to buy a house in a qualified “rural” area — which usually means a population of 20,000 or less.  

But those other two loan types — conventional and FHA — are a lot easier to come by. 

You’ll still need to meet credit and income guidelines with one of these, just like any other mortgage. But there are no ‘special’ requirements to get a low-down-payment FHA or conventional loan as a first-time home buyer.

How much should a first time home buyer put down?

The amount you put down as a first time home buyer is up to you. For instance, you might qualify for a conventional loan with just 3% down. But then you’d have to pay for mortgage insurance. So if you can afford it, you might decide to make a 20% down payment anyway to lower your loan amount and monthly payment. 

Take a look at this example: 

First Time Home Buyer Loan Minimum Down Payment  Down Payment $ Amount for a $250,000 house Monthly Payment (Principal & Interest / Mortgage Insurance)*
Conventional LoanWITH Mortgage Insurance 3% $7,500

$1,363

($1,123 / $240)

FHA Loan 3.5% $8,750

$1,311

($1,137 / $174)

VA Loan 0% $0

$1,184

($1,184 / $0)

USDA Loan 0% $0

$1,243

($1,169 / $74)

Conventional Loan WITHOUTMortgage Insurance 20% $50,000

$926

($926 / $0)

*The example above assumes a 30-year fixed-rate mortgage with a 3.75% interest rate

As you can see from the table above, there are certain benefits to making a bigger down payment. Namely, you have a smaller loan amount. That means your monthly payments are smaller. 

You’ll also be able to avoid mortgage insurance if you put down 20% or more. That can shave another $100 or more off your monthly bill. 

But making a smaller down payment has benefits, too — even if they aren’t as obvious. 

When you make a smaller down payment, you keep money in your emergency fund. And you save yourself some money to make improvements and repairs to your new place (which many home buyers end up having to do). 

Plus, with a smaller down payment, you can get into a house and start building equity sooner — instead of having to wait up to 14 years to save 20%. 

Finally, remember that your mortgage isn’t set in stone. 

If you want to get into a house sooner, it often makes sense to make a smaller down payment with what you have saved now (or what you will have saved in the near future). 

Then, you can usually refinance a few years down the road to get rid of mortgage insurance and reduce your monthly payment. 

First time home buyer down payment assistance 

Here’s the good news: If you’re a first time home buyer, you might not have to cover the whole down payment yourself. 

First time buyers can apply for grants or low-interest loans, called “down payment assistance,” to help with their upfront contribution.

There are more than 2,500 of these programs nationwide, and qualified buyers can receive anywhere from $2,000 to more than $39,000 toward their down payment and/or closing costs. 

Number of down payment assistance programs by state

Map showing the number of active down payment assistance programs in each state

Source: Down Payment Resource and The Urban Institute

It’s hard to generalize who qualifies for down payment assistance, because all 2,500 programs could have slightly different guidelines. But it’s common for these programs to prefer first time home buyers, low- to moderate-income, and targeted “development” areas. 

>> Related: Down Payment Assistance Programs in Every State for 2020

Look for first time home buyer down payment assistance programs near you to see what you qualify for. 

These are often run by state and local governments, and can be found by Googling “down payment assistance grants in [state, county, or city].”

Using gift funds to cover your down payment 

A key feature of many first-time home buyer loans is that they let you cover the whole down payment with gift funds. For example: If you’re buying a $250,000 home with a 3.5% down FHA loan, your entire $8,750 down payment could be a gift from your parents. 

The Conventional 97 loan and Freddie Mac Home Possible also allow 100% of the down payment to come from gift funds. 

Fannie Mae’s HomeReady loan, by contrast, requires a 3% borrower contribution at minimum. So you’d have to pay at least $7,500 toward that $250,000 home out of pocket. 

Gift money can come from a parent, friend, employer, or anyone generous enough to help you out with your home purchase. 

However, if you’re going to use gift funds toward your down payment, they have to be properly documented by the gift giver and the home buyer. That means writing a “gift letter” to show your lender that the money came from a verified source. 

 >> Related: How to give and receive a cash down payment gift for a home

First-time home buyer loan programs

As a first-time home buyer, you can choose how much money you want to put down towards the purchase price. 

The down payment can be as large as you wish, or as small — so long as you make the minimum investment required by your lender and loan program.

The six most common low- and no-down-payment mortgages used by first-time home buyers are the FHA loan, the VA loan, the USDA loan, the Conventional 97, and the HomeReady or Home Possible mortgage.

Each is described below.

FHA loans — 3.5% down payment 

FHA loans require a down payment of 3.5% of the purchase price at minimum. 

FHA loans are popular with first-time home buyers because the program allows below-average credit scores.

If you have a 580 credit score or higher, you can get approved for an FHA loan with just 3.5% down.

And some lenders will even allow credit scores of 500-580, if you can make at least a 10% down payment.

Thanks to these perks and others, FHA mortgage approval standards are considered to be the most friendly toward first-time buyers.

Find out if you qualify for an FHA loan. Start here (Jul 10th, 2020)

VA loans — 0% down payment

VA loans are available to members of the U.S. military and veterans of the Armed Services.

These mortgages provide a 100% financing option — meaning zero down payment — and VA mortgage rates are often lower than those of other programs.

Another big benefit for first time home buyers is that VA loans don’t require ongoing mortgage insurance. 

So unlike FHA and USDA loans, which both charge mortgage insurance every month, the VA loan simply has one upfront “guarantee fee” and that’s it. Without the monthly insurance fee, homeowners can save thousands over the life of their loans.

Find out if you qualify for a VA loan. Start here (Jul 10th, 2020)

USDA loans — 0% down payment 

USDA or “Rural Housing” loans also allow 100% financing. The program is available for homes in rural areas and less-dense suburban neighborhoods nationwide. USDA, which backs these mortgages, usually defines “less populated” as an area with 20,000 residents or fewer. 

Another important guideline for USDA loan is the income cap. To qualify for a Rural Housing mortgage, you can’t make more than 115% of the local median income (meaning you’re 15% above the median). 

USDA mortgage rates are often as low as VA mortgage rates. And mortgage insurance for USDA loans tends to be cheaper than for FHA loans. 

Find out if you qualify for a USDA loan. Start here (Jul 10th, 2020)

The Conventional 97 loan — 3% down payment 

The Conventional 97 loan is — like the name implies — a type of conventional loan. These mortgages are backed by Fannie Mae and Freddie Mac. 

Available to home buyers with good credit score (620 or higher), the conventional 97 loan requires just 3% down. And it lets you cover the whole down payment with gift funds, if you wish. 

The HomeReady and Home Possible mortgage — 3% down 

The HomeReady and Home Possible mortgages are two other conventional loan programs with 3% down. They’re geared toward lower-income and/or multigenerational households, but all home buyers are welcome to apply.

The HomeReady program is backed by Fannie Mae, and Home Possible by Freddie Mac.

Home buyers using either HomeReady or HomePossible get access to discounted mortgage rates, and can use the income of boarders and other household residents to help get mortgage-qualified.

Find a low down payment loan that works for you 

First time home buyers have lots of options when it comes to making a down payment. 

To minimize your out-of-pocket cost, make sure you research your loan options thoroughly, as many require just 0% to 3% down.

And don’t forget to look into down payment assistance options near you. Help is available for first time home buyers who know where to look for it.

Verify your new rate (Jul 10th, 2020)

Step by Step Guide

First-Time Home Buyer