Do 5% Down Payment Programs Still Exist?

Do 5% Down Payment Programs Still Exist?

Absolutely!  In fact, there are programs available that allow for as little as a 3.5% down payment.  However, there are limitations on such programs that should be explained to you by a mortgage broker or loan officer.  Here a couple of common examples of when low down payment programs are allowed:

1)    Conventional Loans: If the loan amount does not exceed $417,000 (the national conforming loan limit) AND credit scores exceed 680, then a home buyer should be eligible for a 5% down payment.  The good news is that the rates on 5% down payment loans are usually the same as if you put 20% down.  The disadvantage is that the lender will require mandatory Mortgage Insurance (MI) that can cost hundreds/month.

2)    FHA Loans: FHA loan have become extremely common over the past few years because they allow for as little as 3.5% down payments (15% for condos/townhomes).  Plus, depending on the county the property is in, FHA allows for loan amounts up to $729,000, which can be very helpful in high-cost areas like the Bay Area.  In addition, FHA interest rates are as good or sometimes BETTER than conventional loans, which is a great advantage.  However, just like conventional loans, the lender will require mandatory mortgage insurance each month, which will cost hundreds of dollars; and FHA also requires upfront mortgage insurance that will be added to the loan (typically 1% of the loan amount).

These two examples are very popular and represent a significant portion of all loans originated in the United States.  Although the mortgage insurance premiums can be a significant investment each month, they are typically tax deductible and the home buyer can purchase a home for very little down, which offers the comfort of retaining some liquidity for home maintenance and cash reserves.