Max Pepper, CNNMoney

How to buy a home without a mega down payment

By Shannon Gupta, CNN | Posted - Oct. 26, 2017 at 8:36 p.m.

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NEW YORK (CNN Money) — For cash-strapped Millennials, saving for a down payment on a home can be downright daunting.

If a traditional 20 percent down payment sounds out of reach, you'll be happy to know that some mortgages will allow you to put down as little as 3.5 percent of your home's purchase price.

But there's a catch. Putting down less means you're borrowing more — and will have to pay interest on that entire loan.

You're also on the hook for extra fees on top of all the regular expenses that come with home ownership.

Here's how to decide if down payment assistance is right for you.

Step 1: Understand the challenges

Making a down payment of less than 20 percent will result in higher monthly payments.

That's because you'll need to pay for special mortgage insurance to protect your lender in the event that you can't afford your loan.

Private mortgage insurance typically costs between 0.5 percent to 1 percent of the loan, depending on your credit score. Your premium will end once you reach 22 percent home equity.

Federal mortgages have two premiums. First, there's the up-front premium, which is 1.75 percent of your loan. You'll also owe an annual premium, which will vary depending on the size and length of your loan.

Keep in mind that if you take out a federal mortgage with less than 10 percent down, you'll have to keep paying your premium for the entire life of your loan.

Those insurance payments can put stress on your finances, especially if you're already tight on cash, warns Hui-chin Chen, a certified financial planner at Pavlov Financial Planning.

If you can't afford to make at least a 10 percent down payment, you may want to pause your home search and save more money, advises Kirk Licata, a CFP at Longview Wealth Management.

Step 2: Do the math

Even if you can afford a house with a low down payment, there are a lot of other costs to consider. In addition to mortgage insurance, you'll also need to pay for homeowners insurance, property taxes and maintenance fees or HOA fees.

Those expenses shouldn't exceed 35 percent of your pre-tax income, says Ashley Foster, a Texas-based CFP.

You should also save at least three months worth of expenses to cover unexpected repairs and other home issues, says David Haas, a CFP at Cereus Financial Advisors.

Next, check your credit score.

You may need a score of at least 700 to to take out a conventional mortgage with a low down payment, says Vincent Barbera, a CFP and managing partner at Newbridge Wealth Management.

Federal loans are generally less strict, depending on the program.


Step 3: Consider your options

There are a whole host of mortgage plans that can help you buy a home without a 20 percent down payment.

One of the most well-known programs is distributed by the Federal Housing Administration. FHA loans allow you to put as little as 3.5 percent down on a home, making it popular among first-time homebuyers.

You'll need a credit score of 580 to qualify for a 3.5 percent down payment and can apply even if you've experienced foreclosure or bankruptcy. Certain states offer similar options.

You could also explore loans through housing mortgage giants Fannie Mae and Freddie Mac. Fannie Mae offers a program known as HomeReady, which allows buyers to put as little as 3 percent down.

Private banks, such as Wells Fargo and Bank of America, also offer mortgages with 3 percent down payments.

Still, experts caution against jumping into one of these mortgages.

"Whether you qualify for a mortgage and whether you can afford the home are very different questions," says Chen.

"Right before the mortgage crisis in 2008, banks and mortgage companies were giving out mortgages with no money down. It doesn't mean that you should take the offer if you cannot afford it."

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