Buying a home is an exciting milestone in life. But for many, the biggest obstacle is saving enough for a down payment. The standard 20 percent down can be tens of thousands of dollars – money that many buyers simply don’t have on hand.
The good news is that there are many options for securing a mortgage with as little as 5 percent down. While low down payment mortgages mean higher interest rates and monthly payments they make homeownership attainable for more buyers.
In this comprehensive guide. we’ll cover everything you need to know about getting a mortgage with only 5 percent down including
Overview of 5 Percent Down Mortgages
- What is a 5 percent down mortgage?
- Pros and cons of low down payment loans
- How interest rates and payments work
5 Main Loan Programs for 5 Percent Down
- Conventional 97 – 3 percent down
- FHA loan – 3.5 percent down
- VA loan – Zero down payment
- USDA loan – Zero down payment
- HomeReady Mortgage – 3 percent down
Costs and Requirements
- Private Mortgage Insurance (PMI)
- Mortgage insurance premiums
- Credit score and debt-to-income requirements
- Homebuying or financial literacy classes
Tips for Getting Approved
- Have a stable job and income
- Maintain a good credit score
- Lower your debt-to-income ratio
- Make a larger down payment if possible
The Mortgage Application Process
- Preapproval and documentation
- Comparing mortgage lenders
- Submitting your application
- Loan estimate and closing
Let’s get started!
What is a 5 Percent Down Mortgage?
A 5 percent down mortgage simply means you only need to provide 5 percent of the home’s purchase price as a down payment to qualify. This saves you from having to save up tens of thousands of dollars that a 20 percent down payment requires.
On a $300,000 home, for example, 5 percent is just $15,000 versus $60,000 for 20 percent down This lower hurdle allows more buyers to achieve homeownership sooner.
While low down payment programs have existed for decades via FHA, VA and USDA loans, conventional lenders have expanded options beyond government-backed loans. These include:
- Conventional 97 – 3 percent down
- HomeReady Mortgage – 3 percent down
So in many cases, you may actually need less than 5 percent down.
Pros and Cons of 5 Percent Down Mortgages
Pros
- Lower down payment is easier to save
- Gets you into homeownership sooner
- Can buy a more expensive home
- Build equity faster through monthly payments
Cons
- Higher interest rates than 20 percent down
- Must pay mortgage insurance until 20 percent equity reached
- Monthly payments are higher
- More interest paid over loan term
While low down mortgages have some tradeoffs, for most buyers the benefits outweigh the costs. Being able to buy 1-2 years sooner has major advantages for building wealth through equity and avoiding rising rents.
How Interest Rates and Payments Work
With only 5 percent down, you’ll borrow 95 percent of the purchase price. This larger loan amount means higher interest rates. Typically rates are 0.25 – 0.5 percent higher compared to 20 percent down.
For example:
- 5% down mortgage – 4.5% interest rate
- 20% down mortgage – 4.0% interest rate
This translates into higher monthly payments on a 5 percent down loan as well. Below is an example on a $300,000 purchase price:
5 Percent Down Payment
- Loan amount: $285,000 (95% of $300,000)
- Interest rate: 4.5%
- Monthly payment: $1,485
20 Percent Down Payment
- Loan amount: $240,000 (80% of $300,000)
- Interest rate: 4.0%
- Monthly payment: $1,265
While the higher rate and payment are disadvantages, a 5 percent down buyer pays $220 less per month than they likely would on rent. This gets your foot in the door of homeownership.
You can refinance later when you have 20 percent equity to drop the mortgage insurance and get a better rate.
5 Main Loan Programs for 5 Percent Down
There are several mortgage programs that allow down payments of 5 percent or less. Let’s take a look at the main options.
1. Conventional 97 (3 Percent Down)
Conventional 97 loans are backed by Fannie Mae or Freddie Mac. They offer flexible credit guidelines with just a 3 percent down payment.
Key Features:
- 3 percent down payment
- Minimum 620 credit score
- Loan amounts up to $647,200
Conventional 97 used to require higher MI premiums than FHA, but Fannie Mae and Freddie Mac have aligned pricing with FHA loans. This makes Conventional 97 very competitive for low down payment buyers.
2. FHA Loan (3.5 Percent Down)
FHA loans are government-insured and offer low down payments even with lower credit scores.
Key Features:
- 3.5 percent down payment
- Minimum 580 credit score
- Low down payment even with less-than-perfect credit
- Lower debt-to-income ratio allowed
FHA used to be the go-to for 3.5 percent down. But with conventional options now available, FHA is best suited for buyers that need its more flexible credit and debt requirements.
3. VA Loan (Zero Down Payment)
VA loans are backed by the Department of Veterans Affairs and require no down payment for eligible buyers.
Key Features:
- Zero down payment required
- No monthly mortgage insurance
- Available to veterans, active duty, and surviving spouses
VA loans offer great terms, so veterans and active duty should definitely consider this option. No down payment and no monthly mortgage insurance provides huge savings.
4. USDA Loan (Zero Down Payment)
USDA loans are zero down payment mortgages for low income buyers in rural areas.
Key Features:
- Zero down payment required
- Low income eligibility limits
- Property must be in USDA-eligible rural area
If you meet the income limits and are buying in a qualified rural zone, USDA loans are a compelling option to receive significant down payment help.
5. HomeReady Mortgage (3 Percent Down)
The HomeReady program offers a low 3 percent down payment for low-to-moderate income buyers.
Key Features:
- Just 3 percent down
- Income limits apply
- Available on 1-4 unit properties
HomeReady is geared towards making homeownership attainable for underserved communities. Grant programs can also help cover the down payment.
Costs and Requirements of 5 Percent Down Loans
While low down mortgages offer more accessible payments, you’ll take on additional costs compared to a 20 percent down loan.
Private Mortgage Insurance (PMI)
The biggest extra cost is private mortgage insurance or PMI. This is required on conventional loans with less than 20 percent down to protect the lender from default.
PMI is typically 0.5 to 1.5 percent of the loan amount per year. On a $300,000 mortgage, this equates to $1,500 – $4,500 annually. PMI can be canceled once you reach 20 percent home equity through payments and appreciation.
FHA loans require upfront and annual mortgage insurance premiums. VA and USDA loans do not charge monthly PMI.
Mortgage Insurance Premiums
Here are estimates of upfront and annual mortgage insurance costs:
- Conventional 97 – 1.75% upfront, 0.5 – 1.5% annual
- FHA loans – 1.75% upfront, 0.9 – 1.8% annual
- VA loans – 2.3% upfront only
- USDA loans – 1.0% upfront, 0.35% annual
So you’ll pay anywhere from $4,000 – $9,000 in mortgage insurance to get a 5 percent down conventional or FHA loan.
Credit Score and Debt-to-Income Requirements
To qualify for a mortgage with 5 percent down, you’ll need:
- Minimum 620 credit score for conventional
- 580 score for FHA, 640 for VA
- Front-end DTI of 28% – 50%
- Total DTI around 50%
Make sure to check your credit reports and scores a few months before applying. Pay down balances and correct any errors to boost your scores.
Lower your DTI by paying down debts and trying to reduce monthly obligations like loans, credit cards, and child support.
Homebuyer Education May Be Required
Many programs require pre-purchase housing counseling for first-time buyers. Courses can be taken online, by phone, or in-person.
Costs
Higher rate of return
One reason conservative homeowners should be careful about how much they put down is that doing so can reduce the property’s ROI. Imagine that your home’s value increases by the historical national average of 5% per year.
Today, your home is worth $400,000. In a year, it’s worth $420,000. Regardless of your down payment, the home is worth $20,000 more.
That down payment will affect your rate of return.
- With 20% down on the home—$80,000—your rate of return is 25%
- With 3% down on the home—$12,000—your rate of return is 167%
That’s a huge difference.
But we must also consider the higher mortgage rate plus the mandatory private mortgage insurance that accompanies a conventional 3%-down loan. Low-down-payment loans can cost more each month.
- Assuming a 175 basis point (1.75%) bump from rate and PMI combined, we find that a low-down-payment homeowner pays an extra $6,780 per year to live in their home
- With 3% down and making an adjustment for rate and PMI, the rate of return on a low-down-payment loan is still 105%
The less you put down, the larger your potential return on investment.
Do you need to put 20% down on a house?
Contrary to what you may have heard, there is no requirement for a 20% down payment when purchasing a home. With a 20% down payment, lenders won’t require mortgage insurance on a conventional loan.
You can, however, buy a house with a lower down payment. In fact, the National Association of Realtors reported in 2023 that the median down payment for first-time home buyers was 13%. The average down payment drops to 8-10% for buyers aged between 23 and 41
This shows that many buyers are able to purchase homes without putting down the full 20%.
Conventional Loan – 5 Down?
FAQ
Is 5% down enough for a mortgage?
Can I get a loan with 5 percent down?
Can I put down 5% on a conventional loan?
How much of a down payment do I need for a $300,000 house?
Can I buy a house with a 5 percent down payment?
Here are five loan options for those who have 5 percent or less for a down payment. Check your eligibility to buy a house with less than 5% down. Start here (May 21st, 2024) Conventional loans are mortgages approved using guidelines established by mortgage giants Fannie Mae and Freddie Mac.
How does a 5% down payment affect mortgage payments?
1. Impact on monthly mortgage payments: A lower down payment results in a higher loan amount and monthly mortgage payments. On a $300,000 home, paying 5% down reduces the principal and interest payment by about $40 per month versus 3% down. 2. PMI Comparison: Both 3% and 5% down payment loans require private mortgage insurance (PMI).
What is a low down payment mortgage?
There are programs available for homebuyers with less than 5% to put down on a home. FHA loan. This is usually the most popular option for low down payment mortgages. Put as little as 3.5% down with an FHA loan. VA loan. If you’re a veteran or current service member, you might be eligible for a loan with no money down at all. USDA loan.
What is the minimum down payment for a home loan?
Fannie Mae HomeReady: A HomeReady loan only requires a 3% down payment. Income restrictions apply, but first-time and repeat home buyers are eligible. Federal Housing Administration (FHA) loan. The minimum down payment for an FHA loan is 3.5% with a credit score above 580 and 10% for credit scores from 500 to 579.
What if I can’t get a 5% down mortgage?
But there are ways around this: 0% down mortgage. If you can’t come up with 5% down, look into a 0% down mortgage specific lenders offer. These include VA and USDA loans, as well as state- and community-backed loan programs for low-income buyers.
Do you need mortgage insurance if you put down 20 percent?
Many loans made to people who put down less than 20 percent require you to buy private mortgage insurance. The policy doesn’t protect you; instead, the lenders receive money if you default on the loan. The cost — usually a monthly premium added to your mortgage payment — is based on your credit score, amount of down payment and the insurer.