Low Down Payment Mortgage Options

Written by Eric and Shel House of MLS Mortgage Group
Updated June 15, 2021
Craftsman bungalow house with trees
Found the perfect house to buy? Here are some mortgage loans worth checking out if you're not sitting on thousands of dollars for a down payment. (Photo by Matt Cowan)

An FHA loan vs. a conventional loan. Find out which mortgage loan may be best for you.

What are some of the low down payment mortgage options available today? VA offers 100-percent, zero-down financing. But what if you’re not a veteran?

USDA Rural Housing Service (RHA) offers 100-percent, zero-down financing to everyone, but it must be in a rural development area. For those in the cities, what are the options?

There are two common low down payment mortgage loan options: Conventional 97 percent Loan-to-Value (3 percent down) option and FHA's 96.5 percent LTV (3.5 percent down) option, but how do you determine which option is best?

Let’s review some of the differences between the two loan programs. But first, what is FHA? FHA stands for Federal Housing Authority. The Federal Housing Authority is an insurer — it provides Mortgage Insurance (MI) on loans made by FHA-approved lenders.

Now, let’s continue onto the low down payment mortgage options.

More cash for closing

A minimum of 3 percent versus 3.5 percent for a down payment isn’t a huge difference; but if you’re short on funds when you’re purchasing a home, the extra 3 percent interested-party-contributions (including the Seller) really helps toward the closing costs!

FHA allows up to 6 percent contributions versus conventional’s 3 percent allowed contributions with the minimum down payment. Additionally, if you’re working with a lender that offers you a credit for the interest rate chosen, the credit usually ends up being a little higher with FHA, despite FHA’s interest rates being lower on average.

Careful not to equate lower interest rates with savings — when you include the upfront MI premium, it effectively raises the cost. For a quick comparison, check out the APR to see the actualized cost.

MLS Mortgage comparison

Mortgage insurance

FHA charges mortgage insurance up front and monthly. The upfront premium is usually added on to your base loan amount to lessen the amount you must bring to closing.

If you’re putting less than 10 percent down on an FHA loan, you’ll be paying mortgage insurance until the loan is paid off. If you put more than 10 percent down, you do have the option to cancel the insurance after 11 years.

With a conventional loan, you have the opportunity to remove the mortgage insurance after the home appreciates. In most situations, it will cancel automatically if you pay the principal down to 78 percent LTV; or if values increase, you may have the option to get an appraisal to prove the home’s value to remove the mortgage insurance earlier.

We did a comparison between the two minimum low down payment mortgage loans and the differences were astounding. In the scenario of a $250,000 loan with a 740 credit score, the difference ended up being over $42,000 more over 30 years if you went with the FHA loan compared to the conventional.

If you think you’ll be staying in the home so it has a chance to appreciate or you may be making additional payments to your principal balance, it’s definitely worth checking out conventional financing. Conventional mortgages also have the option of no MI via lender-paid MI.

Repair loans

Both FHA and conventional offer Home Improvement or Renovation loans. The main difference? FHA allows their standard 96.5 percent Loan-to-Value versus 95 percent LTV for conventional financing.

Credit requirements

One of the biggest differences between FHA and conventional are the credit requirements. Currently, we have access to FHA financing with credit scores in the 500s with a higher down payment, but if you want the minimum 3.5 perent down, your credit score will need to be at least 580.

There are conventional financing options for scores as low as 620 with 3 percent down. With the lower credit scores, the biggest differences are the costs involved between higher interest rates and required mortgage insurance.

So, which is the best mortgage option?

If you have good credit, money for a down payment and plan to keep your home for an extended period of time, then conventional financing may be a better fit for you. If your credit has some imperfections, FHA may be the better low down payment mortgage.With the myriad of difference and possibilities, the best way to truly figure out the best option for you is to consult an experienced Mortgage Loan Originator. An experienced professional will review your specific situation and supporting documentation to present low down payment mortgage options to you. Then you will be able to make an informed, personalized decision.

Have you used an FHA or Conventional loan? Tell us about your experiences in the comments section below. 

About this Experts Contributor: Shel and Eric House run MLS Mortgage Group based in Minneapolis. They are happy to assist anyone planning on purchasing or refinancing a home in Minnesota. Follow this contributor on FacebookTwitter and Google Plus.

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