10% Down Payment Mortgage Programs — Which is Best?
Imagine you want to buy a home priced at $500,000. That may sound like a lot of money — and it is! — but in many real estate markets, it’s only an average price tag.
That makes it tough for the average buyer to save up the recommended 20% down payment before making a purchase. You would need $100,000 in cash before you even start attending open houses.
The good news is you don’t have to save a full 20% of a home’s purchase price before you get a mortgage. There are plenty of options for hopeful homebuyers who only have enough cash to put 10% down (or even less).
Of course, these options come with their own upsides and drawbacks. It can get confusing to sort through the differences, so in this blog post we’ll explain some of the most popular choices and why it could or could not work for you. (See our quick comparison chart below)
You Can Get a Conventional Mortgage with 10% Down
A 20% down payment is recommended, but it’s not required for getting a mortgage. Lenders can underwrite conventional, 30-year, fixed-rate loans for buyers who bring 10% to the table, too.
That’s great if you want to stick with a conventional loan. But there are some tradeoffs involved.
For one, you can expect to pay PMI. Lenders typically require private mortgage insurance on any loan that finances more than 80% of the home purchase. If you fail to repay your mortgage, that insurance policy pays out to the lender to help cover their losses.
But you have to pay the PMI premiums, and that can add a significant amount of money onto your monthly mortgage payment.
In this case, you’ll already have a higher payment thanks to putting down less money upfront. The addition of PMI could push your mortgage into unaffordable territory.
Lenders also usually want to see a higher credit score if you only have a 10% down payment. For those who don’t have it, getting approved for the 90/10 mortgage may be difficult.
Put As Little as 3.5% Down with an FHA Loan
If you don’t have the best credit score and don’t have a lot of money for the down payment, you might still be in luck.
You may be eligible for an FHA loan, which is backed by the federal government and offers better terms for those who want to make a smaller down payment. You can buy a home with as little as 3.5% down when going through the FHA. Credit score requirements are more relaxed than what you’ll find when going through a private lender.
But while FHA loans don’t come with PMI, they have their own type of mortgage insurance. Depending on the cost of your home and how much you borrow, it could end up being more expensive than PMI.
FHA loans also come with limits on how much you can borrow. Because they’re guaranteed by the government, there is a lot more paperwork and a lot more hoops for borrowers to jump through, too.
If you’re a veteran, you can consider a VA loan instead. These loans don’t require you to have a down payment at all, do not come with mortgage insurance, and have a cap on closing costs. You will need to pay a funding fee to the VA, however. And it’s not just you that will need to qualify for the loan: the property you want to buy must meet certain conditions, too.
Have 10% Down? Consider a Piggyback Loan
Not all buyers qualify for FHA loans. Even fewer can gain access to a VA loan. If those two programs backed by the federal government don’t work for you, you might be able to return to private lenders for a piggyback loan.
Also known as an 80/10/10 loan, these provide buyers with a 10% down payment to borrow the other 10% required through a loan on top of their mortgage. This allows you to use a full 20% down payment with your mortgage lender, so you don’t have to pay PMI.
The numbers in the name come from the breakdown of funding sources: 80% of the home is financed through a regular mortgage. The buyer puts down 10% of their own cash — and then borrows the other 10% to total a 20% down payment.
Of course, this gets complicated quickly and is only a good option for people with:
- Good credit, to qualify for both loans at the same time.
- Strong income and cash flow, to keep their debt-to-income ratio manageable even with the second loan
- Great money management skills and confidence in their ability to manage two separate loans and pay them off on time (even ahead of schedule, assuming no prepayment penalty is attached to either loan)
Piggyback loans have their own pros and cons which you should be aware of before signing on the dotted line.
If You Don’t Want More Debt: Get An Investment Instead
The biggest problem with piggyback loans? You still finance 90% of the home purchase. But instead of dealing with just a mortgage, you have a second loan to manage and repay.
If you don’t want to take on more debt but want to get a mortgage with just 10% down, you can use a home ownership investment instead.
Home ownership investment programs like the Unison HomeBuyer program only require a 10% down payment. Unison provides you with the other 10% so you can approach a lender with a full 20% down payment — and avoid PMI and higher monthly mortgage payments in the process. Because this is an investment, there’s no money to repay as part of your monthly mortgage payment and no interest rates to worry about either. Instead, Unison shares in the future change in value of the home when you sell it – up to 30 years later.
Which Option Is Best If You Have a 10% Down Payment (or Less)?
Still not sure which option works best for you? Here’s a quick comparison chart to help you evaluate your options when you have 10% down:
|Mortgage Program||Pros||Cons||Best For|
|Conventional loan||You can get a standard mortgage with just 10%.||Your monthly mortgage payments will be higher because you’re financing more and paying PMI.||Buyers who won’t save money with other options, like FHA loans or piggyback loans.|
|FHA loan||You can get a mortgage for as little as 3.5% down and credit limits are less strict than with private lenders.||You could pay a lot more for your loan over time, thanks to higher interest rates and FHA mortgage insurance and other fees.||Buyers with very small down payments who may not stay in their homes for the full term of the loan (and could therefore avoid paying all the mortgage insurance costs).|
|VA loan||You can take out a home loan with no down payment and no mortgage interest. Closing costs are capped, too.||Only veterans and servicemembers qualify. You still need to pay fees and your property needs to meet certain standards to qualify.||Qualifying servicemembers and veterans who want to buy a home that qualifies, too.|
|Piggyback loan or other creative financing||You can buy a home with a conventional mortgage and avoid PMI, even when you only have 10% in cash to put down.||You could end up with more debt to manage, which can quickly get out of control if you miss payments. Might not be a cheaper option than PMI.||Buyers with excellent credit and strong incomes to manage both loans at once — and who can qualify for low enough interest rates to spend less on the second loan than they would on PMI on a conventional loan.|
|Home ownership investment||You can buy a home with a conventional mortgage and avoid PMI, even when you only have 10% in cash to put down.||You need to work with the investment program and won’t get to keep 100% of your profit when you sell the home.||Buyers who want to avoid additional debt and have lower monthly payments in exchange for sharing the appreciation when they sell the home.|