Rising home prices make it harder for first-time homebuyers to purchase a home. Fortunately, the mortgage lending industry has relaxed down payment requirements over the years, enabling first-time homebuyers to enter the market sooner.

But establishing a down payment strategy should go beyond the savings account. Government and nonprofit programs provide down payment funds for first-time homebuyers. And some government-backed home loan programs require no down payment and offer low interest rates.

Learn more about down payment and loan options, where to find down payment assistance, and how to weigh the pros and cons of different down payment

Down Payment Requirements for First-Time Homebuyers

While the 20% down payment is considered traditional (and less risky for lenders), it’s a lot of money for first-time homebuyers to come up with. To help buyers get into homes more easily, mortgage lenders offer loans with down payments as low as 3%. To qualify for a 3% down payment mortgage backed by Fannie Mae (a major purchaser of mortgages on the secondary market), a homebuyer must meet certain requirements:1

• At least one of the loan applicants must be a first-time buyer. This can mean that an applicant has never owned a home or has not owned a home in the last three years.
• Lenders only offer this type of loan for a one-unit property, which can be a house, condominium, cooperative, planned unit development, or townhouse. A 3% down payment mortgage is not available for manufactured homes.
• The homebuyer must occupy the property as a primary residence.
• This type of mortgage requires a fixed-rate loan.

For low-income homebuyers with limited funds for a down payment, Fannie Mae offers the HomeReady Mortgage.2 Offered to first-time and repeat buyers, the HomeReady program requires borrowers to have a credit score of at least 620 and extends loans for purchases and refinances. This type of mortgage provides financing up to 97% of a home’s loan-to-value ratio.

Down Payment Assistance Programs

If you don’t have the money to make a down payment on a home, you can find assistance programs at the federal, state, and local levels. Typically, down payment assistance programs require homebuyers to meet certain income requirements.

Homeowner Voucher Program

For low-income homebuyers who don’t have the funds for a down payment, HUD sponsors the Housing Choice Voucher program, administered by local public housing authorities (PHAs). To qualify for the funding, you must:3

• Meet HUD’s first-time homebuyer qualifications.
• Meet income requirements set by your local PHA.
• Have at least one adult loan applicant who has worked full time for a year or more.
• Complete a homeownership course.

You can apply for the Housing Choice Voucher program through your local PHA or by contacting HUD’s PIH Customer Service Center.

State Down Payment Assistance Programs

Some states sponsor programs that offer down payment funding for first-time homebuyers. For example, the New Jersey Housing and Mortgage Finance Agency (NJHMFA) administers the First-Time Home Buyer Mortgage Program and Down Payment Assistance Program (DPA). Both programs offer assistance for the purchase of homes in New Jersey.

The DPA offers up to $10,000 in funding, interest-free, to cover down payment or closing costs. DPA loans are forgivable if the homebuyer stays in the home for at least five years and does not refinance.4

Local Down Payment Assistance Programs

Some local governments also provide down payment funding. For instance, New York City’s Department of Housing Preservation and Development offers no-interest down payment loans up to $100,000 through its HomeFirst program.5 New Yorkers can request down payment assistance to purchase a one- to four-family condominium, cooperative, or house.

To qualify for HomeFirst funding, a buyer must meet certain qualifications:

• They must not have owned a home in the past three years.
• Their household’s gross annual income cannot exceed 80% of their area’s median income.
• They must contribute at least 3% of the home’s purchase price, with at least 1% from their own funds. 

HomeFirst borrowers who borrow $40,000 or less have up to 10 years to pay off the loan, while those who borrow more than $40,000 have up to 15 years. New Yorkers can apply for down payment assistance at the HomeFirst office.

$0 Down Payment Mortgages

If you have no funds for a down payment and don’t meet the requirements of a down payment assistance program, you only have a couple of options. The U.S. Department of Agriculture (USDA) offers $0 down payment loans for rural homebuyers and the U.S. Department of Veterans Affairs (VA) backs home loans for service members, veterans, and surviving spouses.

USDA and VA loan programs have strict requirements, which can include affiliation, citizenship constraints, and income limits.

USDA Home Loans

The USDA’s Rural Development (RD) division backs mortgages to build, buy, or repair homes located in rural areas of the United States. All USDA loans require applicants to meet income requirements.

Single-Family Housing Direct Home Loans

USDA’s Single-Family Housing Direct Home Loans program also called the Section 502 Direct Loan Program, provides mortgages for low- and very-low-income rural homebuyers.6 Typically, Single Family Housing Direct Home Loans require no down payments. The program provides payment assistance, the amount determined by an applicant’s adjusted household income.

Rural homebuyers can apply for a Single Family Housing Direct Home Loan at their local RD office.

Single-Family Housing Guaranteed Loan Program

The USDA offers Single-Family Housing Guaranteed Loan program mortgages to low- and moderate-income homebuyers through participating lenders. The program offers up to 100% financing, with a 90% loan note guarantee to lenders.7

To qualify for a Single Family Housing Guaranteed Loan, the borrower must meet certain requirements:

• Their income can’t exceed 115% of the area’s median household income.
• They must occupy the home as their primary residence.
• They must hold U.S. citizenship or be a qualified alien or non-citizen national.

VA Home Loans

The VA provides government-backed home loans through private banks and mortgage lenders. Borrowers can use VA loan funds to build, buy, adapt, or repair a home. While the VA does not require a down payment on the loans they back, some lenders might.

VA loans do not require paying private mortgage insurance and feature limited closing costs and low interest rates. The VA does not limit the use of VA loans to first-time homebuyers. So, qualified borrowers can seek VA loans for home purchases throughout their lifetimes.

Pros and Cons of Making a Minimum Down Payment

Pros Explained

• Keep more of your cash: Choosing a low down payment allows you to hold on to more of your savings for home furnishings, maintenance, renovations, and repairs.
• Buy a house sooner: For some households, saving for a down payment can take many years. But by choosing the low-down-payment route, you can buy a home sooner.

Cons Explained

• Higher monthly payments: Making a low down payment will increase your monthly mortgage payment and, over time, require you to pay more interest.
• Higher interest expense: Often, making a low down payment will require paying a higher interest rate because the lender must assume more risk.
• Private mortgage insurance: Paying less than a 20% down payment usually requires you to pay mortgage insurance.
• Reduced equity: Making a low down payment requires more time to build equity. And, if the housing market takes a dive, you may face negative equity in your home.

Frequently Asked Questions (FAQs)

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