Buying a Home Without a 20% Down Payment

For many people, the biggest hurdle to homeownership is saving up enough money for the down payment. To get the best terms on a loan, most lenders prefer that you pay 20 percent of the mortgage upfront. In many cities, that means you need to have $60,000 or more saved up in the bank. That’s a daunting amount, especially for first-time homebuyers who don’t have a home they can sell to get the funds.

There are options out there for people who don’t have a full 20 percent saved, but most come with drawbacks. Our best advice is to be patient and save, save, save. Use the Redfin Home Affordability Calculator to figure out how much you can afford to pay for a house, and then create a plan to save each month toward your down payment. But if you don’t want to wait until you have a full 20 percent saved, there are options. Here’s what you need to know.

You CAN Get a Loan With as Little as 3.5% Down…

In 2015, Fannie Mae and Freddie Mac, the biggest U.S. providers of mortgages, began accepting low-down-payment loans. That means it is possible to get a conventional loan through a local lender with as little as 3.5 percent down, as long as you have good credit and well-documented income. If your credit is less than stellar, you should look into an FHA loan, which is insured by the Federal Housing Administration and has less stringent credit requirements.

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But It Will Cost More Over Time …

In most cases, if you put down less than 20 percent of the home’s purchase price, you’ll need to pay private mortgage insurance, which protects the lender if you default on your loan. The insurance usually costs from 0.15 percent to 2.5 percent of the loan amount, and will be tacked onto your monthly payments. You’ll also pay a higher interest rate on your mortgage. These costs can really add up over time, so be sure to factor that in when you’re deciding whether to buy a home without a 20 percent down payment.

And May Reduce the Chance of Having Your Offer Accepted …

If you live in an area where there are more people who want to buy a home than sell, you’ll have to compete with other house hunters. In hot markets like San Francisco, that can mean competing against more than a dozen other offers. In those situations, a seller will typically choose the person with the best financing. All-cash offers are preferred, but if there aren’t any of those, a seller will probably choose the buyer with the largest down payment. You can see how competitive it is in your area by checking out the most recent Redfin Real-Time Housing Market Tracker. Before you make an offer, be sure to discuss your options with your real estate agent to be as competitive as possible.

But Help is Out There…

Many cities, states, companies and nonprofits offer down payment assistance programs. You should talk to a local lender to learn more about the options in your area. The Redfin Open Book Directory can help you find lenders in your area that come highly recommended by Redfin clients and agents.

I hope this information will help you assess whether or not you should buy a home with less than 20 percent down. If you still have questions and would like some advice from a Redfin agent, please get in touch, we are happy to help!

About Sara Fischer
Sara is a Redfin real estate agent serving the Tucson, Arizona, area. She has more than 20 years of experience helping clients navigate the ups and downs of buying and selling homes. If you have questions about buying a home, you can find the contact information for Sara on Redfin; she’d be happy to help.