While it’s commonly thought that a buyer needs to put down 20% to purchase a new home, that’s not actually true. In fact, the average down payment is around 6% to 7% for a first-time homebuyer, according to the National Association of Realtors.
In addition, conventional financing offers 3% down payment options without an income limit but does require that one individual on the loan be a first-time homebuyer. There are extra incentives if your income is below a specific income threshold, said Bill North, North Texas market leader for BOK Financial Mortgage.
Don’t consider yourself a first-time buyer? Not so fast! If you haven’t owned a home within the last three years, you may still qualify for this 3% down payment opportunity.
“There are programs that allow for lower down payments on mortgage products for certain borrowers. These programs can often help people overcome the gap for the initial expense of the down payment and closing costs,” said North.
For starters, aspiring homeowners can accept gifts to help fund their home down payment, North said. “Even if you don’t qualify for the formal programs, accepting a gift from a relative for a down payment could help you make progress toward your home ownership goals. Before accepting the gift for this purpose, however, it would be wise to consult with a mortgage banker to understand who qualifies to give that gift.”
We rounded up ways you may be able to catch a break on your down payment and closing costs through various homebuyer programs, many of which are focused on first-time homebuyers:
Federal Housing Administration (FHA) Program
If you’re a first-time buyer, have a less-than-perfect credit score, or have limited funds for a down payment, the FHA offers government-backed loans with requirements that are easier to meet. “This backing mitigates risk for lenders, allowing them to offer more favorable terms for borrowers who may not qualify for conventional loans,” North explained.
For eligible applicants, FHA loans typically require lower down payments—as low as 3.5% of the purchase price.
VA Home Loan Program
For veterans buying their first home, the U.S. Department of Veterans Affairs (VA) offers a program to support them, active-duty service members and eligible surviving spouses. Benefits include favorable terms, no down payment requirements, competitive interest rates and limited closing costs. With the backing of the VA, approved lenders can provide loans to qualified applicants, even if they have limited credit history or low credit scores.
"The goal of the VA loan process is to put eligible veterans, military members and spouses into a home," said Justin Coats, regional mortgage operations manager for BOK Financial Mortgage. "A lot of the work we do is educating the borrower so that they understand what that process entails."
USDA Rural Development Program
For homebuyers seeking to purchase property in a rural area (as defined by the U.S. Department of Agriculture, USDA), there are various initiatives to offer support from the USDA Rural Development Division, such as the Single Family Housing Guaranteed Loan Program and the Direct Loan Program which provide affordable financing option for eligible individuals and families with low- to moderate incomes. Features include competitive interest rates, zero down payment options and flexible credit requirements.
“The program aims to stimulate rural development and increase homeownership opportunities to underserved communities,” said North.
Native American Home Loan Program
The Native American Home Loan Guarantee Program, administered by the U.S. Department of Housing and Urban Development (HUD), offers assistance to Native Americans who may face barriers to traditional financing. Benefits include low down payments, competitive interest rates, and flexible credit requirements. The loans empower Native Americans to purchase homes on or off tribal lands.
"What’s most important to us is that we match borrowers with the right program for them," explained Heather Drummond, senior manager of community business development for BOK Financial.
"We have to understand where you—the borrower—want to be as far as payment is concerned and how much you have to put down. That's why it's very important to discuss these questions upfront."
Local down payment assistance and community second liens
Down payment assistance programs are available to help eligible homebuyers fund their down payment on a new home or closing costs. More than 2,000 of these programs are available nationwide and most are city, county or state-specific, North said.
State-specific bond programs
Every state has programs designed to provide access to homeownership. Some local, state and federal housing authorities offer bond programs for qualified single family residential mortgage loans. They’re typically made available to low- and moderate-income borrowers at below-market interest rates and/or upon other terms and conditions favorable to the borrowers.
Conventional loans
Banks or credit unions typically provide conventional mortgage loans that are not backed by programs that offer insurance or guarantees by a government entity.
“Loans are granted based on an assessment of the borrower’s creditworthiness and ability to repay,” said North.
Typically, borrowers need a credit score of 620 or higher and a steady income to qualify for competitive interest rates and terms. These loans also require down payments ranging from 3-20% of the home’s purchase price. However, conventional loans have fewer restrictions and more variety of terms than government-backed loans.
As mentioned earlier, conventional financing options with 3% down payment are open to first-time homebuyers and individuals who fall below specific income thresholds. If you’ve not owned a home within the last three years, you may qualify for this 3% down payment opportunity.
Where to start
Many loans provide flexible funding for down payment, and closing costs can come from multiple sources, including gifts, down payment assistance or bond programs, with no minimum personal funds required.
So, if you’re feeling discouraged about the amount you need to save up for a down payment to buy a home, there may be a program that’s a good fit for you to lower the barrier to entry to homeownership, North said.
“It’s important to find a good loan officer in your area. They can help you review the various options and assistance available to fit your unique situation.”
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