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Your 2023 Guide to Low-Down-Payment Mortgages

It’s a perennial question for would-be home buyers: How can I possibly come up with such a huge down payment?

The short answer, usually, is you don’t.

Most first-time home buyers (and even many repeat buyers) don’t have the 20 percent down payment needed to qualify for the lowest mortgage rates and to avoid extra costs like mortgage insurance.

Even if you’ve managed to amass a reasonable sum, your down payment doesn’t buy you as much as it would have a year ago — mortgage rates are roughly double what they were then, and home prices haven’t deflated enough to offset those higher costs in many areas.

But it’s still possible to lock in your sale with a smaller sum, whether you’re searching for a modest home on a teacher’s salary or financing something with a hefty year-end bonus or gift. Many programs, supported in some fashion by the federal government, allow down payments as low as 3 percent or even no money down. They go by funny names and a collection of abbreviations — Fannie Mae, Freddie Mac, F.H.A., V.A. and U.S.D.A., to name a few.

The mortgages on the market now are more tightly regulated and less risky than the loans that contributed to the housing crisis of 2008 to 2009; many of those products didn’t even require borrowers to prove their income. Still, there are inherent risks when you have such a small stake in your home.

People can lose their jobs, or have health or other crises. And one possibility stands out as especially concerning: If the value of the property declines quickly, a borrower could end up owing much more than the home is worth, a phenomenon known as being underwater.

This happened to many borrowers a decade ago, when U.S. home prices fell 32 percent from April 2006 through March 2011, according to CoreLogic. By the end of 2009 — the lowest point — 26 percent of borrowers owed more money than their homes were worth.

The less you put down, the farther you could sink in such a scenario. If you need to move, you may be forced to sell the place for a price much less than what you owe — and you may be stuck owing the leftover balance.

Despite the risks, most first-time home buyers get their proverbial foot in the door with low down payments. The typical down payment for first-time home buyers was 6 percent, according to recent research from the National Association of Realtors. And nearly 47 percent of all government-backed loans had down payments of less than 20 percent, according to Inside Mortgage Finance. That number is often far higher for first-time home buyers.

There are no right answers, only optimal choices for your circumstances and financial situation. And you can make the most appropriate choice only if you understand all your options — and then shop around.

The following guide, which includes a menu of mortgages that permit low down payments, can help you get started.

How does the mortgage market work?

It’s worth pausing for a moment to break down how the mortgage market operates: Some lenders hold on to loans they make, but most sell them to Fannie Mae or Freddie Mac, the quasi-governmental entities that guarantee a majority of U.S. mortgages. Fannie and Freddie either hold the loans or package them into bonds that are sold to investors, who collect a share of the income from your monthly payments. If you fall behind, the companies guarantee that the investors will get paid anyway.

Another entity, Ginnie Mae, ensures payment to investors that bought mortgage bonds holding loans made through other government programs, including the Federal Housing Administration, which lends largely to first-time home buyers; the Department of Veterans Affairs; and others.

These institutions operate behind the scenes and don’t interact with consumers. They exist to provide stability in the mortgage market, a continuous source of financing and assistance to lower- and moderate-income families looking for a path to homeownership, which can be an effective means to building wealth.

The size of the mortgages the government is now willing to back illustrates just how inflated the housing market has become: Starting this year, Fannie Mae and Freddie Mac will for the first time back loans up to $1 million in high-cost areas and $726,200 everywhere else — which means borrowers can put down well under 20 percent on pretty sizable loans with the government’s blessing (as long as they can safely afford the monthly payment).

Are there any extra costs for low-down-payment mortgages?

In most cases, smaller down payments come with added costs, which vary by program.

Many loans made to people who put down less than 20 percent require you to buy private mortgage insurance. The policy doesn’t protect you; instead, the lenders receive money if you default on the loan.

The cost — usually a monthly premium added to your mortgage payment — is based on your credit score, amount of down payment and the insurer. According to Freddie Mac, you can expect to pay $30 to $70 per month for every $100,000 you borrow. But some low-down-payment programs, particularly those tailored to lower- and moderate-income borrowers, may offer better pricing or even waive the insurance requirement.

Once a borrower’s stake in the home reaches 20 percent, insurance is usually no longer required. Other low-down-payment loan programs also require some form of mortgage insurance, but they go by different names and costs vary.

What type of low-down-payment loans are available?

Federal Housing Administration. The F.H.A., which generally insures loans with down payments of 3.5 percent or more, is often a solid option for lower- to middle-income borrowers who have thin or spotty credit histories.

But it’s not necessarily the cheapest option. All borrowers pay what is known as an upfront mortgage insurance premium of 1.75 percent of the loan amount, which is often added to your mortgage, so you don’t actually have to pay it upfront. Then, on 30-year fixed-rate mortgages with less than 5 percent down, for example, there’s an annual insurance premium of 0.85 percent of the loan amount, which is broken into monthly payments. (The fee is lower for loans with higher down payments and shorter terms.)

One downside: The F.H.A. does not allow borrowers to drop mortgage insurance once they have built up 20 percent in equity as other loans backed by the government do.

These mortgages are available through F.H.A.-approved lenders. But if you’re seeking guidance from an independent expert, housing counselors certified by the U.S. Department of Housing and Urban Development can be a helpful resource to get you started.

Freddie Mac and Fannie Mae. They offer several low-down-payment options through lenders, both under their standard loan programs and those tailored to first-time buyers and lower- and middle-income households. Most of their programs permit down payments as low as 3 percent to qualifying borrowers, slightly lower than F.H.A. loans.

And within the past year or so, both Fannie and Freddie have begun allowing lenders to judge many prospective borrowers using a wider lens. They can, for example, give points to loan applicants who have kept a positive cash balance in a checking account over time, or who have a good track record for paying rent on time. “All of those get factored into the evaluation,” said Danny Gardner, a senior vice president of client and community engagement in Freddie Mac’s single-family division.

The various programs cater to different groups. Freddie Mac’s HomeOne mortgages permit down payments as low as 3 percent only when at least one borrower is a first-time home buyer. (Many governmental programs define this as someone who hasn’t owned a residential property in at least three years.) And the program has no minimum credit score.

Freddie’s Home Possible program is similar, but it’s geared to all lower-income borrowers — those who earn 80 percent or less of their area’s median income. The program waives fees usually charged to people with lower credit scores and mortgage insurance usually costs less.

Family gifts are permitted to cover part or all of the down payment on a primary home, closing costs, or to put into a bank account after closing to ensure the borrower has money on hand for an emergency — as long as you can show you don’t need to pay it back. Both Freddie’s HomeOne and Home Possible programs are designed to allow borrowers to receive down payment assistance from other programs run by states, cities or local organizations.

Fannie’s version, called its HomeReady program, allows buyers to put down as little as 3 percent and may result in lower monthly payments compared with its standard mortgages. It puts a ceiling on income (no more than 80 percent of the property area’s median) but it accepts people with credit scores as low as 620. It generally permits gifts, too.

Marc Hernandez, president at Alterra Home Loans, which caters to first-time Hispanic home buyers, said that lower- to middle-income borrowers often fare better with products like HomeOne or HomeReady compared with the standard loans backed by Fannie or Freddie, or those offered through the F.H.A. “Their qualifications are a little tougher than an F.H.A. in terms of debt-to-income and credit score,” he said, “but the loan terms tend to be a little more favorable than an F.H.A. mortgage.”

Even the standard mortgages backed by Fannie Mae and Freddie Mac — or those that aren’t necessarily tailored to first-time or lower-income buyers — permit qualifying borrowers to make down payments as low as 3 percent. But the interest rate will vary based on your circumstances, including: monthly debt payments relative to income; credit scores; down payment size and how much savings is left after closing.

If any of those factors fall outside of certain thresholds, you may be charged more or be required to keep extra savings in reserve to cover a certain number of mortgage payments. It’s important to remember that Fannie and Freddie each have their own set of requirements, but mortgage lenders may have even stricter rules and different costs, which is why comparison shopping is crucial.

Department of Veterans Affairs. V.A.-backed loans — available to eligible veterans, and members of active-duty service, the National Guard, the Reserve and eligible surviving spouses — do not require borrowers to put any money down. The program doesn’t require a minimum credit score, though the approved lenders making these loans might.

V.A. loans made with low down payments don’t require ongoing mortgage insurance, but borrowers who put down less than 5 percent will pay a one-time fee of 2.3 percent of the loan amount. (Higher down payments translate into lower fees; repeat-program users pay more.) Just more than half of current borrowers are exempt, however, because they receive disability compensation or for another qualifying reason.

The fee can be rolled into the loan, which means you can end up with a loan that exceeds the value of your home from the very start.

V.A. doesn’t charge extra fees for low credit scores or higher debt loads, so mortgage rates tend to be more consistent across its borrowers. But lenders may fold in their own costs, so it pays to shop around.

The program also has a dedicated team of loan technicians who offer borrowers financial counseling and help them deal with their loan servicer.

U.S. Department of Agriculture (U.S.D.A.). When the pandemic hit, many people fled cities for greener spaces, and some turned to a special type of government loan that you might think is reserved for farmers.

For those looking to buy in rural areas, the U.S.D.A. has programs offering mortgages with no money down to eligible borrowers — those with low or middle incomes. For example, a couple earning roughly $104,000 could apply for a loan to purchase or build a home in certain rural areas in San Bernardino County, Calif., through an approved lender.

There are rules, however, and costs, including a 1 percent upfront fee of the loan amount and an annual 0.35 percent fee of the unpaid principal balance.

Where can I find these mortgages?

In recent years, non-banking lenders like Guaranteed Rate, LoanDepot and Rocket Mortgage have become some of the biggest players in the mortgage industry. They may not offer or be familiar with every available low-down-payment loan program, so it’s always worth beginning any conversation by asking about specific products.

Credit unions, which are owned by their members, may have their own low-down-payment mortgages or flexible policies that can help borrowers qualify for a loan.

Not all credit unions are hyperlocal or exclusive. The Pentagon Federal Credit Union, for instance, which is among the top-35 mortgage lenders, will let anyone join.

Westerra, a Denver-based credit union with similarly loose requirements, has a low-down-payment product for Colorado homes that requires just 3 percent down. Notably, it has no income cap.

Banks — especially larger ones — often have their own proprietary low-down-payment products, including Chase and Bank of America, which will let eligible applicants put no money down.

U.S. Bank’s low-down-payment “American Dream” loan has a very particular requirement: It requires borrowers to take a course.

“Providing more paths for education will obviously lead to a borrower who fully understands how the loan program works and be more prepared to handle any adversity,” said Lenny McNeil, an executive vice president at the bank.

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