Can You Finance a Mortgage Down Payment?

Can you finance a mortgage down payment? This is a question that many people are asking these days. With home prices on the rise, it can be difficult to save up enough money for a down payment. Fortunately, there are some ways to finance a down payment. Keep reading to learn more about your options.

So, can you finance a mortgage down payment? You can finance your mortgage down payment. Depending on your circumstances, you may be able to take out a personal loan from a bank or lender, use a credit card, or receive a financial gift from family or friends.

If you have the funds available, it is generally advisable to pay your down payment in full up front. This allows you to avoid interest charges and get into your home faster.

However, if you cannot come up with the full amount right away, financing your down payment is an option worth considering – particularly if interest rates are low and you expect to remain in your home for many years to come.

If you wish to find out more about down payment requirements and discover ways to reduce the down payment amount, make sure you continue reading. 

Is Down Payment Always a Requirement When Purchasing a House?

After applying for a mortgage and getting approved, most mortgage lenders expect a buyer to provide a down payment at closing. It means that you, as a buyer, will be obliged to pay an agreed percentage of the total purchase price upfront.

How much money you need to set aside depends on the lender, but people often count on a standard 20% down payment. 

However, due to the rapid rise in property prices, that percentage tends to be lower nowadays. According to the National Association of Realtors, the average down payment in 2021 was around 12%.

The Size Of a Mortgage Down Payment Will Affect Your Monthly Loan Expenses 

So that a lender can determine the loan amount and conditions, they must be familiar with your:

  • Income, 
  • Employment situation, 
  • Other assets, 
  • Possible debts, 
  • Credit history,
  • Credit score,
  • The amount of down payment you’re willing to put.

Higher down payments mean bigger homeowners’ interest in the home and are proof of financial stability. Lenders see it as good insurance that they won’t need to deal with unpaid mortgage installments. Because of it, a down payment that amounts to 20% of the purchase price or higher often provides better mortgage conditions, such as lower interest rates

What Brings More Benefits to a Buyer, High or Low Down Payment?

With all moving and closing costs and many other expenses when buying a home, it’s no wonder many struggle to afford large down payments. The housing market is far from ideal for many homebuyers – according to Statista, the average sales price of a new home reached an impressive $405,000 in 2021. 

That means that you would need to set aside $81,000 for a down payment. Some people just cannot afford that kind of money. Looking for lenders that will provide more affordable down payment requirements is the next logical step. However, if you opt for it, you must be careful. 

Interest rates tend to be higher for mortgages with low down payments. And that is not all! If your down payment is less than 20%, your loan-to-value ratio will be considered high, and you’ll be requested to pay private mortgage insurance (PMI). Simply put, a lower down payment brings (significantly) higher monthly expenses.

Should You Consider Personal Loans When You Need to Buy a Home?

Getting a personal loan to cover the down payment cost is not only a bad financial solution but often isn’t even possible. A new loan means new debt that influences your credit score, based on which lenders are determining if you are a suitable borrower. 

Even if you find a lender that will do so, expect it will be done with a great risk on their side, so you must count on very high-interest rates. Therefore, mortgage loans with low down payment requirements are a better solution, even with the additional costs they sometimes imply.

How to Get a Mortgage Loan With a Low Down Payment Requirement?

Different types of mortgages are available for those who cannot afford to put down 20% of the price. The table below will help you discover some of the best mortgage loan programs on a federal level that should be considered when buying a home: 

Mortgage program Minimum down paymentMinimum credit score 
HomeReady (by Fannie Mae enterprise)3%620
Home Possible Advantage (by Freddie Mac enterprise)3%660
FHA loans3.5%580
Jumbo loans10% – 20%660

You may not consider a down payment for jumbo loans exactly low, but keep in mind the risk jumbo borrowers represent to the mortgage lender. 

Are There Any Zero-Down Loans? 

Yes, you can even get a zero-down loan, but there are usually some requirements you must meet. They are:

  • VA loans – a mortgage loan intended for military staff on active duty and veterans, as well as their families. This type of loan is federally-backed, by the U.S. Department of Veteran Affairs and comes with other added benefits besides zero down payment. It’s the best loan offer if you’re eligible. 
  • USDA loans – intended for those who want to buy a house in a rural area. There are two types of this loan: Guaranteed Housing Loan and Direct Housing Loan (for families with low income).
  • Loans from alternative lenders – although they may seem good at first, keep in mind previously mentioned possible high monthly payments and private mortgage insurance.

Down Payment Assistance Programs Differ From State to State

At the same time, plenty of programs on a state basis offer help in the form of down payment grants (based on financial need and income). Look at the U.S. Department of Housing and Urban Development’s website to find out more about the best programs for you. 

Other Ways of Securing Enough Money for a Down Payment 

If you want to avoid private loans as well as the additional cost of private mortgage insurance, a so-called piggyback loan or a second mortgage can be a good solution. It means that you’ll get a loan for 80% of the purchase price, put down 10% and get another loan for the remaining 10%. 

However, in some cases, interest rates for these loans can be high, and they demand a very high credit score. Therefore, make sure you’re entirely familiar with the pricing policy before agreeing. 

If your family member or a friend decides to help you by providing a down payment, note that most lenders accept these gifts, but the whole process must be documented. That means no cash payments or loans are allowed, and there must be proof of transfer. 

The third possibility and the most obvious one is to try and save up enough money. Keep track of your spending and try to limit yourself when possible, open a savings account, sell unused belongings and try getting an additional job. 

Calculate Your Current Financial Possibilities and Decide Can You Finance a Mortgage Down Payment 

For most people, buying a house implies a big hit on their home budget, and a required down payment is a big part of it. Although it would be best to have the whole sum saved up front, sometimes it’s not a real possibility. But make no mistake – every saved up cent counts. 

If you’ve calculated that a 20% down payment is too much, you need to find a loan type with lower down payment requirements. However, be aware of sky-high interest rates that won’t allow you to breathe. Being house-poor isn’t anybody’s end goal, so ensure you can afford a mortgage and be certain that meeting the monthly payments won’t be a problem.