Don't Fear the Down Payment: Low Down Payment Options to Consider

After the housing crisis, it might feel like the whole country went into a panic that lasted for several years. Fears that they had been too lenient in mortgage lending led some institutions to raise the bar significantly, reasserting the dominance of the 20 percent down payment. Since that sort of knee-jerk reaction rarely bodes well in any area of finance, the standards were gradually relaxed once again. The trouble is that the media is still working to catch up. People who hear that first-time home buyers, and particularly people in their 20s and 30s, cannot get a mortgage without 20 percent down, might think that their options are severely limited. The truth is more optimistic than many potential mortgage applicants might expect, so we're going to debunk this common home buying misconception.

Is the 20 Percent Rule Actually a Thing?

Decades ago, the process for securing a mortgage was quite different than it is today. People often bought homes with a sizeable down payment, because housing prices were fairly consistent with income. When the cost of housing rises independently of average household incomes and dramatically outpaces it, the expectation of a large down payment makes less sense. After all, if the first obstacle to buying a $250,000 home is $50,000 in cash, fewer people will buy homes. As such, the 20 percent rule isn't much of a rule at all. Lenders want borrowers to have somewhat of a financial investment in the purchase, but they recognize that it's good business to keep purchases and sales flowing. As a result, many lenders are perfectly willing to engage qualified applicants with a lower down payment.

What is Down Payment Assistance?

Almost all loans, including the ones that are willing to accept down payments of a few percentage points, expect borrowers to chip in at least a little. For first-time home buyers or people with limited income, states may also offer access to certain kinds of down payment assistance programs. These programs typically come in the form of a grant or a loan that the borrower is expected to pay back at some point. People who apply for down payment assistance are usually required to live in the home for a specific amount of time. The rules and restrictions on down payment assistance are left to the states and cities where they are applicable. This means that one state or region may have different guidelines than another.

There are even some businesses looking to help Millennials with their down payments, either by investing in the home's equity or trading the costs from the down payment in exchange for renting out a room.

Are There Low Down Payment Loans?

The way that the 20 percent rule is framed makes it seem like mortgages with lower down payments are quite unusual. In fact, they're fairly mainstream, and they may not limit applicants to first-time home buyers. It depends greatly on the loan itself. Lenders are allowed to set their own requirements for mortgages (as long as they don't cross into predatory lending territory), but they are more likely to permit a lower down payment with some support from the federal government.

The Federal Housing Administration (FHA) guarantees certain loans provided by lenders and may allow a down payment as low as 3.5 percent. Loans guaranteed by the Department of Veterans Affairs (VA) or the United States Department of Agriculture (USDA) might not require a down payment at all. People who can't qualify for these loans may be able to get mortgages conforming to Fannie Mae or Freddie Mac. These government-run organizations buy loan debt from lenders that meet their standards. Each offers a mortgage that requires only a 3 percent down payment. There are limits on the applications they will accept, but the guidelines are pretty reasonable.

How Do I Know When I Have Enough to Put Down?

There are benefits to making a low down payment, but there are also advantages to paying more if possible. In a market of growing home prices, being able to get in earlier with a lower down payment allows people to share in the generation of wealth through accumulated equity. However, it's also important to confirm that, in making a lower down payment, the monthly mortgage payment isn't going to be too high to manage. Being able to buy a bigger house isn't super exciting if there's no money left for anything else after all the bills are paid.

Buying a home is a somewhat arbitrary milestone of adulthood, and people who aren't quite there yet should not feel bad about it. Getting a mortgage is a significant investment with many potential rewards, so it is a worthy goal that can help you get an edge financially. Fortunately, it may take less time to achieve than it has in the past several years.