A Guide to Buying Your Dream Home With a Low Down Payment

Buying a house with a low down payment mortgage can be fantastic for homeowners. You can make more savings for other big expenses. The only trouble might be finding a low down payment option that will suit your needs today and in the future.

The good news is that the number of homeowners securing such options has increased in the past three decades. The average down payment for first-time homebuyers in the U.S. is only 7 percent — not 20 percent, as many may think. And given the rising prices of houses worldwide, these low down payment trends are likely to follow everywhere else.

If you’re trying to find property for sale in Vienna or any other European city with a low down payment, read on to explore your options.

Government-Backed Loans

Government-backed loans are home loans guaranteed by the government or a federal agency. They help borrowers achieve the funding they need to own a home. The US Department of Agriculture and Veterans Affairs are good examples of such loans.

The best part about government-backed loans is that the credit requirements are easier to meet, and the minimum down payment is zero. The interest rates are also very low, and there are flexible repayment options.

For example, VA loans do not include private mortgage insurance (PMI). This is a great benefit for homeowners interested in saving on their monthly payments. PMI on conventional loans ranges from 0.5 percent to 1 percent of the total loan amount.

But these benefits of government-backed loans don’t come easily as there are very specific eligibility requirements.

Eligibility Criteria (USDA)

• Your Income should be below 115 percent of the area’s median income
• The property you are to purchase should be in an eligible rural area
• The property must be a single-family primary residence

Private Loans with Mortgage Insurance

If your household or property does not qualify for government-backed loans, another option is to secure a low down payment mortgage from a bank.

These loans are not insured by the government. PMI plays a crucial role in securing a private loan, protecting the mortgage lender if you default on your mortgage.

You must put down 3 percent to 5 percent of the down payment as your deposit and pay 0.5 percent to 2 percent per month for the PMI. The PMI drops once the loan-to-value on your home is down to 80 percent.

The best thing about these private loans is they can finance a higher loan amount, even though some of them need to follow certain limits. There are also other eligibility criteria for private PMI loans.

Eligibility Criteria (PMI Loans)

• High credit scores
• Low debt-to-income ratio
• A purchased house must be a 1- to 4-unit property

These loans may not be a good deal for some homebuyers. The main reason is the high costs they incur. For starters, you’re required to pay a higher interest rate. You must also pay a percentage of your total loan amount for the monthly PMI. And unfortunately, mortgage insurance premiums aren’t tax deductible.

To put it into perspective, let’s say you have a USD 100,000 loan with a 1 percent PMI fee. That means you’ll end up paying an additional USD 1,000 per year. This will accumulate to a huge amount that you’d do better to add to your savings.

The difficulty of getting your lender to cancel the PMI may also be a dealbreaker for many.

Gifted or Borrowed Down Payments

Gifted or borrowed down payments are the next best thing if you cannot meet the eligibility for government-backed loans or do not want to pay premiums on private PMI loans.

The idea here is to fund the down payment through a gift from someone or borrow it through a personal loan.

One of the biggest benefits of this option is that you can get your full down payment covered. You can also put down a low down payment mortgage yourself and fund the rest with a gift or loan. Either way, you’re left with more money in your hands.

Another benefit is the option to look for more expensive properties, depending on the gifted amount. This will give you a lower loan-to-value ratio, bringing down the interest rate and reducing some of the closing fees.

Most lenders will accept such a down payment under certain criteria:

Eligibility Criteria (Gifted or Borrowed)

• Gifts must come from relatives (spouses, children, dependents, etc.)
• The borrowed down payment should be calculated in your debt burden
• PMI mandatory for less than 20 percent down payment
• Proof of the funds being gift money (a gift letter)

Other conditions determine what type of home you can buy and whether you will need to contribute a percent of the down payment yourself.

Let’s say you want to buy a USD 100,000 house that you will finance with your savings. Your parents generously gift you with an amount that exceeds the 20 percent down payment. You will be able to consider more expensive properties and set aside a considerable sum for repayments, repairs, maintenance, and other expenses — all of it is unconditional.

But like all other loans, this one has its drawbacks. One of the biggest ones is repayment expectations, which can lead to difficulties if you face financial problems in the future.

A key point to remember is that while all of the 20 percent down payment can be a gift, any amount above the annual gift tax exclusion limit will be taxed.

Final Remarks

Whatever your requirements, budget, and preferences, there are plenty of zero or low-down-payment mortgage options. If you qualify, a zero-down option, such as government-backed loans, is the perfect solution. Otherwise, look for a private loan with PMI.

But if you want to save as much money as possible and don’t have enough to make the 20 percent down, borrowing or asking for it as a gift is the best way out.

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