No Money for a Down Payment? Here's How You Can Still Buy a House

If you want to buy a house but don't have enough money to make a 20% down payment, there's still a way to get a mortgage.

Known as an FHA loan, these require as little as 3.5% down and are a popular option for people who can easily afford a monthly mortgage payment but can't spring for a huge one-time lump sum.

Added to this, it isn't necessary to have perfect credit to get approved for a mortgage by the FHA. "Generally speaking, to get maximum financing on typical new home purchases, applicants should have a credit score of 580 or better," explains the FHA website.

That compares to a minimum credit score of 620 that most mortgage brokers are willing to entertain and of 740, which qualifies a borrower for the absolute best mortgage rates available -- scroll through the presentation below to learn how to improve your score.

Another benefit of an FHA mortgage is that the mortgage is assumable. If you decide to sell the house, the buyer can simply take over the existing mortgage as opposed to applying for a new one. This option isn't available for most other mortgages and it's particularly beneficial in a rising interest rate environment as it locks in a lower rate for future purchasers.

Now, as you might have expected, there are downsides to pursuing this route, the biggest of which are two added insurance expenses. The first is due at the time of closing and is known as the up-front mortgage insurance premium, or MIP. This is equal to 1.75% of the loan amount.

The second and related premium is the annual MIP, which is billed monthly throughout the life of the loan. This is the government-issued counterpart to private-label mortgage insurance. The specific rate is a function of the property's loan-to-value ratio as well as the size and duration of the mortgage itself.

The following table shows how the annual MIP is determined. The column on the far left shows the loan amount. The next one over is the loan-to-value ratio. And the third column shows the cost of the insurance in basis points -- each point equates to 0.01% of the total loan amount.

Base Loan Amount

Loan-to-Value Ratio

Annual MIP (Basis Points)

Less than or equal to $625,500

Less than or equal to 95%

130 bps

Less than or equal to $625,500

Greater than 95%

135 bps

Greater than $625,500

Less than or equal to 95%

150 bps

Greater than $625,500

Greater than 95%

155 bps

Source: Federal Housing Administration.

As you can see, while FHA mortgages are a great alternative if you want to buy a house but can't afford a massive down payment, they present their own unique set of qualities, one of which is that they're more expensive as a result of the insurance.

That being said, the FHA route provides an affordable avenue to homeownership for people who may not otherwise have the opportunity to participate in the American dream.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 14, 2014, at 4:02 PM, jelly13 wrote:

    Isn't this a large part of what caused the financial disaster in 2007/08? Too many people who shouldn't have been buying houses that were doing so?

    I'm all for home ownership; it's the largest purchase 99% of people will ever make, but that doesn't mean EVERYONE should buy a house. You have to have the responsibility - and the means, and if you can't pull together 20% for a down payment, that should be the #1 flag that tells you you're not ready.

    And for the taxpayers to be on the hook for that mortgage on top of it - being an FHA loan.... that's asking for too much from the American pocketbook.

    It's one thing for Fannie and Freddie to back up the private mortgages that are already out there because that frees up money for the banks to continue lending, but when the loan originates with the government, that's another story.

    Everyone should have the opportunity to live the American dream, which includes home ownership, but you should have to work for that to show you're responsible enough for carrying out that dream.

  • Report this Comment On April 18, 2014, at 9:15 AM, golfski wrote:

    Why FHA when there are so many lenders willing to offer 5% down that can be all gift money.

    And no, not every person should own a home which is why tighter limits have been placed on documenting income vs debt, payment history via credit scores and other features designed to weed out those who are not safe risks when it comes to finances.

    Even some who do qualify are better renting due to their lack of desire to participate in the care and maintenance of their home. For many it is the largest purchase they will make in their life time and the least cared for liability they own.

  • Report this Comment On April 18, 2014, at 12:57 PM, brucer51 wrote:

    Not sure unqualified loans constituted a "LARGE" part of the financial meltdown. Yes, it created a fabulous disintegration of the foundation of the economic base but the vast leverage created by development of opaque derivatives of the housing mortgages fueled the vast risk and chicanery of the financial institutions that promoted that junk completed the perfect storm bubble.

    Had it only been shaky mortgages, reasonable financial managers would have curtailed the massive proliferation of high risk mortgages...well high risk to the whole system and government, not necessarily the financial whizzes who capitalized on the situation.

  • Report this Comment On April 18, 2014, at 3:14 PM, gskinner75006 wrote:

    Not wise.

  • Report this Comment On April 18, 2014, at 4:24 PM, Schneidku40 wrote:

    I really wish everybody would save at least 10% before buying a house. It saves so many potential headaches. Just be smart everybody. Learn to save, it's a very good skill to have.

  • Report this Comment On April 18, 2014, at 5:21 PM, AlpineLotus wrote:

    Mortgage-backed securities are where the real issue of the 07/08 collapse lies. Fascinating that people rarely acknowledge that fact. The "American Dream" is "debt, debt, debt" and "keeping up with the Joneses". It's well known that people will take the bait if it's waived in front of them long enough.

  • Report this Comment On April 19, 2014, at 12:51 AM, mrshastri wrote:

    25% should be the minimum down payment.

  • Report this Comment On April 19, 2014, at 12:17 PM, thedoge wrote:

    "Isn't this a large part of what caused the financial disaster in 2007/08?" Actually, no. It was extreme short-term thinking and blatant dishonesty in the financial "services" sector.

    I had an FHA loan on my first house and never defaulted on the mortgage. Yes, the MIP adds to the cost up front but, of course, it drops off once your loan balance drops below 95% of the home value. So if you are, in fact, buying a home as a place to live long term and not as some short-term investment to flip (a bad idea no matter what kind of loan you have), it's a pretty good deal.

  • Report this Comment On April 19, 2014, at 1:24 PM, anash91 wrote:


    That isn't true anymore. Once you have an FHA loan originated after April 2013, you cannot take off the MIP without doing a refi on the home

  • Report this Comment On April 19, 2014, at 2:29 PM, wrenchbender57 wrote:

    Be great if someone would edit this forum and get rid of the "ads" for working from home using your computer. Different user names but looks like the same person posting these ads that are disguised as comments. Don't think we really need this kind of stuff cluttering up the comments area.

  • Report this Comment On April 19, 2014, at 2:33 PM, wrenchbender57 wrote:

    I agree with most of the comments here. If you cannot afford the down payment then you probably cannot afford the home. And yes, I also agree that the idea that anyone should be able to buy a home even without a down payment is exactly what caused the last housing crash. Do we really want another one of those in our future? The discipline of saving for the down payment is the best way to afford your own home. Or, just forget it and live in an apartment. I have done both. Living in an apartment is a LOT less work. Everyone does not need their own home or even their own condo.

  • Report this Comment On April 20, 2014, at 6:48 AM, isabelmadsara wrote:

    The credit has the same purchasing power of cash or for a specified period or legal person is in favor of the transfer . Credit transactions with an action today in the promised fulfillment of a certain action at maturity is exchanged.

  • Report this Comment On April 20, 2014, at 9:46 PM, RxPro wrote:

    Here is how to be wealthy when buying a house.

    1) put down 20%, NO EXCUSES

    2) Get a 15 year mortgage

    3) payment no more than 30% of take home pay

    If you do those things, you will guaranteed retire well off maybe even early (house paid off in 15 years).

  • Report this Comment On April 22, 2014, at 12:35 PM, rebozo2 wrote:

    Please monitor these blogs and exise the SHILL messages; they are SO tedious and senders should be made to feel unwelcome.

  • Report this Comment On October 24, 2014, at 6:16 AM, Sunshine08 wrote:

    Okay here we go imma rant about most of ur comments about the government allowing people with low credit scores and low down payments buy a house well I am one of those people and u guys don't know everyone's situations why u are downing it. I was young and dumb got myself into a world of credit card debit at the age of 18 and it has been haunting me every since I have learned my lesson and all my recent credit is good but that past credit is not so good. And as far as a down payment goes I am a single women who lives on my own I am a hard worker and a salaried worker but because I support myself and have a rent payment and car payment it's not that easy to save money we are all not blessed some of us have to work really hard everyday of lives to live I work about 70 hours a week just to make ends meet and your telling me I don't deserve to buy a house?????

  • Report this Comment On November 24, 2014, at 1:28 PM, jafjaf wrote:

    You are not alone , many others live the same life as you and you deserve an opportunity to buy a home. No way should you be punished all your life for foolish mistakes made at 18. I certainly hope it works out for you :)

  • Report this Comment On November 27, 2014, at 10:22 AM, Indrableu wrote:

    It is difficult to get into the house market if you don't have money. Once your in, and you maintain good credit, your in. I'm recently divorced....walked away from a large home & 7 acres, starting over with NOTHING after 28 years. I don't have and will never have 20% to put down. Like you, I work hard and pay my bills. I just need a break. Those who have the means....great for you...I was there once, but not anymore. It's amazing how life can make you see things from a different perspective.

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John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

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