It's hardly a secret that U.S. home prices have been elevated for quite some time. And because home prices are up, buyers often have to put more money down to satisfy their mortgage lenders' requirements.
It's common for conventional mortgage lenders to require at least a 10% down payment on a home. If you don't make at least a 20% down payment, you'll be hit with private mortgage insurance (PMI), a costly expense that adds to your homeownership bills.
Data from Realtor.com finds that in Q3 2023, home buyers made a median down payment of $30,000. But what if you don't have nearly that much cash sitting around?
You may not need it. Here are some options you can explore if you're more limited in down payment funds.
1. See if your lender will go as low as 5%
You may find a conventional lender that will let you put down just 5% on your home's purchase price instead of 10% or more. This isn't so uncommon, but it can also be risky.
If you only put down 5% at closing, you'll start with very little equity in your home. And if the value of your home falls, you could end up underwater on your mortgage (owing more than your home is worth), which could become problematic if you need to sell.
Plus, if you only make a 5% down payment, you may get stuck paying PMI for quite some time. That's only going to add to your ongoing costs. However, it may still be an option worth looking into if you're confident you can afford your recurring homeownership costs but are simply short on down payment funds.
2. Look at an FHA loan
With an FHA loan, you can get away with putting down as little as 3.5% on a home purchase. However, you'll need a minimum credit score of 580 to put down just 3.5%.
That said, FHA loans come with certain extra costs. Not only will you have to pay an upfront mortgage insurance premium (MIP) equal to 1.75% of your loan, but you'll also have to make an ongoing MIP payment.
Like PMI, this can add to your homeownership costs in a pretty big way. Plus, if you don't make at least a 10% down payment on an FHA loan, your ongoing MIPs will apply to the entire length of your mortgage.
3. See if you qualify for a VA loan
If you're a member of the U.S. military, a former member, or the surviving spouse of a military member, then you may be eligible for a VA loan. VA loans actually make it possible to buy a home with no money down at all. But again, when you go this route, you could run into issues like becoming underwater on your mortgage if the value of your home drops after you buy it.
Another problem with taking out a VA loan is that you'll face a potentially costly upfront funding fee. That fee ranges from 1.25% to 3.3% of your loan amount depending on how much you're putting down and whether it's your first VA loan or not.
Not everyone has $30,000 to put down a home. If you have much less cash at your disposal, don't assume all is lost. But do recognize the risks of putting a smaller down payment on a home, even if you can afford the ongoing costs associated with owning one.
