How to Buy a Home With a Low Down
by Brandon Cornett
It's no surprise that so many Americans
are looking for ways to buy a home
with a low down payment.
After all, with so many other costs
associated with a home purchase --
like closing costs, furniture, moving
expenses, etc. -- coming up with
a large down payment isn't always
an option. So the idea of buying
a home with a low down payment can
be very appealing to many buyers,
especially first time home buyers.
Many people mistakenly believe that
a down payment of at least 20 percent
is required in all mortgage scenarios.
This is the way things were for a
long time. But these days, there
are more flexible loan programs and
terms available to home buyers. In
fact, some mortgage lenders will
extend loans to qualified buyers
with a down payment as low as 5 percent
of the purchase price.
Generally, a mortgage loan with
a down payment of less than 20 percent
is referred to as a low down payment
But like all things in life (and
in home buying), there are special
conditions to buying a home with
a low down payment. For instance,
many mortgage lenders who grant loans
with such a low down payment usually
require that the loan be insured
in some way. This insurance is aptly
called mortgage insurance.
Mortgage Insurance for a Low
Mortgage insurance is just what it sounds like -- insurance on a home mortgage
loan. This type of insurance protects the lender financially in the event that
a homeowner defaults (ceases to make payments) on the mortgage.
Mortgage lenders usually require
mortgage insurance on loans with
a down payment of 20 percent or less.
In other words, some form of mortgage
insurance is almost always required
for a low down payment mortgage.
The home buyer is usually required
to pay the cost of this mortgage
Two Types of Mortgage Insurance
- Government and Private
Let's recap what we have covered so far. We know that it's possible to buy
a home with a low down payment, and that a 20 percent down payment is not always
necessary. We also said that most lenders who offer mortgages with a low down
payment (below 20 percent) will also require some form of mortgage insurance.
Thus, buying a home with a low down payment almost always requires mortgage
With that straight, let's talk about
the two types of mortgage insurance
-- governmental and private.
Government Mortgage Insurance
Government-backed mortgages are usually insured by one of three federal organizations.
These mortgages are either insured by (A) the Federal Housing Administration,
or FHA; (B) the Department of Veterans Affairs, or VA; or (C) the Department
of Agriculture's Rural Housing Service, or RHS.
Each of these agencies has its own
criteria for the types of loans they
will ensure. For example, the VA
Home Loan program only applies to
military veterans or their spouses,
and RHS loans are usually reserved
for people in rural areas.
The FHA requires a minimum down
payment of 3 percent. They also limit
the loan amount that they're willing
to ensure based on geographic area.
So this is governmental path to
buying a home with a low down payment.
When you obtain a mortgage loan backed
by one of the federal organizations
listed above, you can make a down
payment less than the traditional
Private Mortgage Insurance
In addition to the three governmental options above, there are also private
companies willing to insure mortgage loans. This too can be a path to home
buying with a lower down payment. Private mortgage insurance is aptly referred
to as PMI. Private mortgage insurance is available to a much wider audience
than the governmental options listed above. For instance, there are no restrictions
regarding military service or rural residence.
Private mortgage insurance, or PMI,
is available on a wide variety of
low down payment home loans and there
is no pre-determined limit on the
loan amount (as there usually is
with the government-backed mortgage
These days, it is certainly possible to buy a home with a low down payment.
In this context, "low" refers to a down payment of less than 20 percent.
These types of home loans require some form of mortgage insurance, either
government insurance or private mortgage insurance (PMI). Here are some resources
to help you learn more about home buying with low money down.
About the Author: Brandon
Cornett publishes the Mortgage
Refi Blog and several other real
estate websites. Visit the author
online at http://www.mortgage-refinance-advice.com/blog/