Alternatives to a 20 Percent Down Payment

Many first-time homebuyers believe they need to save enough money for a 20 percent down payment. However, there are actually several alternative financing options to a 20 percent down payment that are worth looking into.  

Before beginning any homebuying process, it’s important to assess your finances to determine whether it’s better for you to start building equity or continue to pay rent. If building equity is the route for you, start researching the different mortgage loan products available. Let’s breakdown three alternative products, including a conventional mortgage, an FHA mortgage and a 100 percent financed mortgage for you to consider in lieu of a 20 percent down payment. 

A Conventional Mortgage + PMI

One of the most common mortgage options is a conventional mortgage, often for a 30-year term. There is no requirement to make a 20 percent down payment with a conventional mortgage. A conventional mortgage can be obtained with as little as three percent down.  

Keep in mind, the three percent down program often has income limits plus a few additional limitations. If you don’t meet requirements for the three percent down payment, you may need to provide a five percent down payment. 

However, if your down payment is less than 20 percent, you will be required to pay private mortgage insurance (PMI). 

The way PMI is calculated has changed over the years. One change being risk-based premiums, which means the amount of PMI you pay is based on your overall credit profile. PMI can be paid one of two ways: monthly or in a one-time payment. The one-time payment will require more funds to close on the loan but will reduce your monthly payments. 

An FHA Mortgage

Obtaining a Federal Housing Administration (FHA) mortgage is another way to purchase a home with only three and a half percent down. This option is often best for those who have lower credit scores or have a limit on new credit, which may be causing the lower scores. PMI on an FHA mortgage will likely be higher, but the interest rate is often lower. 

A 100% Financed Mortgage

A way to avoid paying a down payment all together is to obtain a 100 percent mortgage  financed mortgage. These mortgages do not require a down payment or PMI; however, because they are amortized on a shorter term, such as 15 or 20 years they do require higher monthly payments compared to a conventional mortgage. 

One big advantage to 100 percent financed mortgages is that you pay less total interest over the course of your entire mortgage length. This is because, although your interest rate is comparable to that of a conventional mortgage interest rate, you have fewer total payments and interest charges. 

If you are able to make higher monthly payments, a 100 percent financed mortgage may be your most financially efficient mortgage option. 

Meet with an Expert

A 20 percent down payment is not your only financing option for purchasing a home. After reviewing your complete credit profile and your homebuying goals, meet with a mortgage loan originator who can walk you through which product best aligns with your situation.