Can’t Afford Down Payment? 7 Steps to Buy Your Next Home Sooner

If you grew up hearing that you need a 20% down payment to buy a house, you may think you can’t afford a home right now (or maybe ever). If so, I have good news for you. The 20% down payment requirement is actually a myth. Many types of loans allow you to buy a home with less than 20% down. In some cases, you can even buy a house with 0% down.

Below, I’ll share a seven-step plan to help you buy your next home sooner. I’ll tell you which types of loans allow lower down payments and share information about down payment assistance programs.

First, here’s a quick summary of no- and low-down-payment options and solutions:

Table of Contents

1. Step 1: Do you qualify for zero down?
   1. VA loans
   2. USDA loans
   3. Physician loans
2. Step 2: Research low-down-payment options
   1. FHA loans
   2. Conventional loans
   3. HomeReady Program/HomePossible Program
   4. Rent-to-own programs
3. Step 3: Stack down payment assistance
4. Step 4: Lower or shift closing costs
5. Step 5: Bring in acceptable gift funds the right way
6. Step 6: Use equity or co-buy options if you already own
7. Step 7: Set smart guardrails before you commit

Step 1: Check whether you qualify for zero down

Over half of Americans say they can’t afford a 20% down payment, according to CNBC News. So here are three loan options that don’t require a down payment if you meet specific requirements.

Quick note: Even with government-backed loans like VA and USDA, you don’t apply through the government. You still get the loan through an approved mortgage lender (a bank, credit union, or online lender), and the government program helps insure or guarantee it.

VA loans

VA loans are government-backed loans specifically for people who have served in the military.

• VA loans allow 0% down.
• They may have more flexible credit score requirements than conventional home loans.
• You also don’t need to pay for private mortgage insurance (PMI).

• However, VA loans do charge funding fees.

USDA loans

USDA loans are government-backed loans designed to help people living in rural areas purchase homes.

• You aren’t required to make a down payment with a USDA loan.

• You do, however, have to pay an upfront fee and an annual fee.

Physician loans

Physician loans are a type of loan designed to help medical professionals get a mortgage.

• Some lenders don’t require a down payment at all, while others require a small down payment.
• Eligible borrowers do not need to pay for private mortgage insurance.

Step 2: Research low-down-payment options too

Not everyone will qualify for a 0% down loan. If you don’t, here are other mortgage options with lower down payment requirements.

FHA loans

• With an FHA loan, you can put down as little as 3.5% as long as you have a credit score above 580.

• However, you’ll be on the hook for one-time upfront private mortgage insurance (1.75% of the loan amount) and monthly PMI.

You can get an FHA loan at a traditional bank or an online bank, like SoFi, our pick for the best close-on-time guarantee.

Conventional loans

• Conventional loan options might only require 3% down.

• However, you’ll likely need to pay for private mortgage insurance.

In the thread below, Redditors debate the benefits of conventional loans versus FHA loans, and many suggest choosing a conventional loan, which often come with lower fees and look more attractive to sellers:

Do I pick a conventional 3% loan or FHA 3.5%
byu/CharacterMeringue921 inrealestateinvesting

HomeReady Program/HomePossible Program

The HomeReady Mortgage and the HomePossible Mortgage programs are designed to help individuals who may not otherwise qualify for a conventional home mortgage.

• They require a low 3% down payment.
• You can stop making PMI payments once you achieve 20% equity.

• These loans are designed for buyers earning a low income, so they’re not available to everyone.

Rent-to-own programs

Rent-to-own programs are agreements between a tenant and the landlord where the tenant agrees to rent a home for a specific period and have portions of rent count toward a down payment.

• These programs allow buyers time to save for a down payment while living in the home and to begin building equity while renting.

• But most companies are only available in certain geographic areas, and agreements often require an option fee of 2.5% to 7% of the purchase price.

Step 3: Stack down payment assistance

In addition to getting a low-down-payment loan, you can also research down payment assistance programs. Many local governments, nonprofits, and lenders offer down payment assistance, grants, forgivable loans, and even deferred payment loans. 

To find assistance you may be eligible for, visit DownpaymentResource. This website lists more than 2,000 homeownership assistance programs nationwide.

Step 4: Lower or shift closing costs

Another option is to lower closing costs by asking for seller concessions. If your home inspection reveals issues that need to be repaired, you can ask the seller to give you a credit toward those repairs at closing.

If your lender offers this option, you can also request lender credits. With this option, the CFPB explains that the lender reduces the cash you need to bring to closing. However, in exchange, you will pay a higher interest rate, which can cost you more over the life of your loan.

Step 5: Bring in acceptable gift funds the right way

Some family members gift funds to children or other relatives to help them make a down payment. One USA Today article mentioned that some couples are even requesting cash for a down payment as a wedding gift instead of a matching set of china.

If you received a cash gift to use toward your down payment, be sure to follow down payment gift rules, according to Zillow. That means you will likely need to provide documentation to explain the cash gift and any other large lump sums in your bank account prior to closing.

Step 6: Use equity or co-buy options if you already own

If you are already a homeowner, you can use a HELOC or home equity loan to get funds for a down payment on your next home or on a vacation home. It’s important to remember that if you can’t make your HELOC or home equity loan payment, your lender has the right to foreclose on your home. Use this method only if you’re confident you can repay your loan on time.

Another option is to purchase a home with a trusted family member, romantic partner, or friend and split the down payment, as discussed in this Reddit thread:

Is purchasing a house with long term close friends feasible?
by inpersonalfinance

As Redditors point our, though, there can be several drawbacks to this arrangement. Some suggested creating a co-buyer agreement that outlines financial responsibilities, maintenance agreements, and an exit clause.

Step 7: Set smart guardrails before you commit

Finally, before you decide to buy a house, make sure you have a few financial guardrails in place. Here are a few to consider.

• Emergency fund: Homeowners should have an adequate emergency fund set aside specifically for home maintenance issues.
• Keep your monthly housing cost less than 30% of your income: This is a good rule to follow to ensure you can comfortably afford your home and maintain positive cash flow.
• Understand your PMI payment: Find out whether it’s possible to eventually remove your PMI payment. If so, monitor your home’s value so you know when to request removal.
• Make a contingency plan: No one wants to think about a worst-case scenario, but it’s important to plan your next steps should you get laid off or have a medical emergency.

As part of your contingency planning, it’s also a good idea to find out if your neighborhood, homeowners’ association, or city allows you to rent out a room if you need extra income. Or, if you’re buying a home with a spouse, budget to see whether you can afford your mortgage on one income.

Thinking through these scenarios and making sure you have an adequate emergency fund can help you decide what type of house to buy and how much to allocate to your monthly payment and maintenance costs.