How much do you really need to start to buy a house?

Embracing couple in front of a home.
A new home could be in your future sooner than you think, even if you haven’t saved for a 20% down payment. In fact, you can buy a new home with as little as a 3.5% down payment.

Do you think you need a 20% initial to buy a house? Think again.

Many people believe that it takes a 20% initial to buy a home.

However, it is possible to buy even a new home with as little as 3.5 percent upfront, or even no down payment.

A June 2 survey of 017,2014 adults conducted online by Wells Fargo found that 44 percent have a mistaken belief that it takes a 20 percent down payment to buy a home, although many types of loans allow for a much lower down payment, according to Ron Sozio, sales manager for the construction division at Wells Fargo in Somerville. N.J.

“The reality is that most of the time you don’t need 20%,” says Sozio.

This misperception could be typical of first-time buyers and people who lost their home to foreclosure during the 2008 financial crisis, says Kevin Pearson, president of RMC Mortgage, a subsidiary of Ryland Group in Westlake Village, California.

“People often assume that you need to have a 20% initial when in fact as little as 3.5% or 5% might be enough for you to have a home,” Pearson tells us.

Low initials aren’t just for homes for resale. In fact, there are just as opportunities to buy a new home, according to Malcolm Hollensteiner, director of retail loan sales and production at TD Bank in Cherry Hill, N.J.

“If a homeowner is going to buy a traditional single-family home from a builder, there is no difference in down payment requirements from buying an existing home across the street,” Hollensteiner says.

So what are the minimum initials?

Conventional loans

The minimum initial required for a conventional loan under Fannie Mae or Freddie Mac guidelines with a loan amount of up to 417,000 is only 5% of the home’s purchase price. If the amount is greater than $417,000 the initial amount can be as little as 10%.

“Most lending institutions have jumbo loans with a little over 10% initial available in the market,” says Sozio.

Even lower initials may soon be allowed for conventional loans, given that Fannie Mae has announced it will roll out a 3% program, according to Ryan Rosenthal, manager of the Pacific construction division at Prospect Mortgage, a mortgage company in Sherman Oaks, Calif.

FHA Loans

The minimum initial for an FHA loan is only 3.5% of the home’s purchase price. This means that a down payment for a home of, say, $250,000 would be only $8,750 with this type of loan. FHA loans are insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Human Development (HUD), a federal government agency.

VA and USDA Loans

VA loans, guaranteed by the U.S. Department of Veterans Affairs (VA), and USDA loans, backed by the U.S. Department of Agriculture (USDA), do not require a down payment, meaning buyers can purchase a home with very little down payment. VA loans are available to most active military personnel and U.S. military veterans, among other groups. USDA loans are available in rural and outlying suburban areas.

Conventional FHA, VA, and USDA loans allow at least a portion of the buyer’s initial to be a gift from a family member or funds from a down payment assistance program. “With FHA, 100% of the down payment can come from gifted funds, and with the conventional loan with a 5% initial payment, all of that 5% can come from a gift,” Pearson says.

Some builders allow buyers to save some of the initial during home construction if, Sozio says, “they’re very close to the amount they need.”

Mortgage Insurance

The reality is that most of the time you don’t need 20%. — Ron Sozio, sales manager for Wells Fargo’s construction division in Somerville, N.J.

Low initial loans typically provide for mortgage insurance or a financing fee. Insurance is paid monthly. The finance fee is paid upfront, but can be financed as part of the loan amount or at a higher interest rate.

“The FHA will always have mortgage insurance. The VA will have a finance charge. Conventional loans will have mortgage insurance, until you have paid 20%. Mortgage insurance of 80% of the value of the property is no longer necessary,” Pearson explains.

Without mortgage insurance, lenders wouldn’t be able to offer low-initial loans, and borrowers who don’t have large amounts of cash wouldn’t be able to buy a home.

Custom built houses

Down payment requirements for new homes are almost always the same as for existing homes, but there are two possible exceptions. The first exception is custom built or custom homes.

Many new homes are mass-produced homes built in large numbers by homebuilding companies. These are usually not considered custom homes, although they come with many custom options.

A true custom home involves buyers obtaining financing to buy the land, hiring a builder, and often an architect as well, to build a home especially for them. In that case, the lender will request a higher initial payment, since the house does not yet exist, explains Hollensteiner.

“In the case of custom homes, when the buyer is responsible for financing construction costs, buyers typically use a build-to-permanent or CP loan. With this program, there is a difference in the initial one, (compared to) a house already built,” he says.


The second exception is new condominiums.

Whether the buyer needs a higher initial in this situation will depend on the guidelines of the lender, the type of loan, the location of the property and the proportion of units that have been pre-sold during the construction phase.

Rosenthal cites Florida and Las Vegas as two places where lenders could request a higher initial and higher proportion of pre-sales so a buyer can finance their new condo. “It’s a little harder (to buy with a low start) in those markets,” he says.

Get pre-qualified

Simply put, most people don’t need a high initial to buy a home, and some don’t need any down payment.

The only way to know about insurance is to talk to a lending institution. “A lot of people have the income and the means to buy a new home but they’re stuck on the idea, for whatever reason, that they can’t do it,” Pearson says. “I think you’d be surprised if they really qualified.”

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By Catharine Bwana