Back in the day, a 20% down payment was standard. But as property values have grown over the past few decades, 20% down became more and more unrealistic (especially in high-value markets like the Bay Area). By 2020, the median down payment was just 12%. But even this is unreasonably high for many buyers.
Luckily, there are several options for buyers who are unable to save for a substantial down payment. Here are four clever ways to buy a home with a low down payment.
1. 3% Down Conventional Loans
If you have good credit, a conventional loan with a 3% down payment might work well for you. The exact qualification requirements vary by lender, but you generally need a credit score of at least 620 to qualify for the 3% down.
The downside to a low down payment conventional loan is that you will need to pay monthly PMI (Private Mortgage Insurance). This insurance protects the lender against borrowers who default on their mortgage. This can add hundreds of dollars to your monthly mortgage payment, but most lenders allow you to remove the PMI once your equity in the home reaches 20%. And with growing property values, you might hit that mark sooner than you’d expect!
2. 3.5% Down FHA Loans
FHA loans are generally known as the first-time buyer loan because they were designed to help people buy their first home, even if those buyers had a low down payment and some credit issues. FHA loans have a broad definition of first-time buyer. Even if you’ve owned a home before, you can qualify as a first-time buyer if you haven’t owned a home in the past three years.
FHA loans are insured by the US government, so they pose less of a risk to the lender. And since the lender is taking less risk, they’re willing to work with lower credit ratings. You can qualify for 3.5% down with a 580 credit score. And if your credit score is lower, you might still qualify for a 10% down payment.
Like with conventional loans, you’ll need to pay PMI if you put down less than 20%.
3. 0% VA Loans
VA loans are reserved specifically for military service members, veterans, and their families. In addition to the benefit of 0% down, qualified buyers can avoid the PMI charge with VA loans!
Another cool benefit is that you can use VA loans to buy multi-family properties of up to four units as long as you live in one of the units. So if you have dreams of becoming a real estate investor, this could be a great option for you. But you will need good credit. Expect lenders to require a credit score of at least 640.
4. 0% USDA Loans
The USDA launched this 0% down program to help low-to-medium earners buy a home in rural areas. To qualify for a USDA loan, you need to choose a home in a qualifying rural area. While much of the Bay Area is too urban to qualify, you can find qualifying areas outside of the cities.
In addition to finding a qualifying property, you need to have good credit of around 640 and you can’t exceed the income caps.
The Bottom Line
There are several ways to buy a home with a low down payment. You just need a lender who can help you explore your options and a real estate agent who can find homes that qualify for your chosen loan program.
If you’re considering buying a home in the Bay Area, contact Sequoia Real Estate. Our experienced real estate agents can refer you to qualified lenders and help you find the home of your dreams, even with a low down payment!