4 Lower-Cost Mortgages That Can Help You Achieve the American Dream

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  • While it is a good idea to make a 20% down payment on a home if you can, it isn't always required.
  • If you're willing and able to pay mortgage insurance, you can consider FHA and conventional 97 loans.
  • USDA and VA loans have more eligibility requirements, but don't require any down payment at all.

You don't have to be rich to buy a home.

There are a lot of myths and misconceptions about home buying out there. As Vivian Tu of Your Rich BFF noted in a recent video, pop culture doesn't always tell the truth about the mortgage process, and not everyone buys a "single-family home, with a white picket fence, in a development" by making a 20% down payment and using a conventional mortgage. Tu discussed four different types of mortgages that have a lower upfront cost for the borrower, and can therefore make it easier for the average American to buy a home. To be clear, if you can make a 20% down payment for a home purchase, you will be able to avoid paying for extra mortgage insurance that can add hundreds of dollars to your monthly mortgage payments. And unlike, say, homeowners insurance, this type of insurance (called MIP on an FHA loan or PMI on a conventional loan) only benefits your lender, as they are taking on a larger risk by lending you more than 80% of the cost of a home purchase. But since it can be difficult to save up a 20% down payment for a home if you live in a high-cost area or don't make a large salary (or both), read on to learn about four types of mortgages that might be available to you with less money down.

1. FHA

An FHA loan can be a great move for first-time home buyers, as it is a product specifically created by the federal government to help more people buy homes. FHA stands for the Federal Housing Administration, which is part of the Department of Housing and Urban Development (HUD). Traditional mortgage lenders, like banks, offer FHA mortgages, and then this government agency guarantees the loans by compensating your lender if you don't pay your loan back. This means FHA mortgages are available with a 3.5% down payment for people with lower FICO credit scores (as low as 580 for that 3.5%; if you have a credit score between 500 and 580, you'll need to make a 10% down payment). FHA mortgages come with the privilege of paying for mortgage insurance premium (MIP) for the life of the loan, but if you refinance to a conventional mortgage once you reach 20% equity, you can eliminate the extra costs.

2. Conventional 97

A conventional 97 is a conventional mortgage with a 3% down payment requirement, meaning that you'll be financing 97% of your home purchase. However, you'll need to pay private mortgage insurance (PMI) until you reach 20% equity. Unlike FHA mortgages, if you're hoping to score a conventional mortgage with only 3% down, the credit score requirements will be more stringent. The minimum FICO score for a conventional loan is generally 620, but to qualify for a better interest rate, you'll likely need a score in the 700s or better. So a conventional 97 could be the mortgage loan for you if you don't have a robust down payment but do have really good credit.


If you want to buy a home in a qualifying rural or suburban area of the country and are considered low income, you can look into a USDA loan. They are offered by mortgage lenders and guaranteed by the U.S. Department of Agriculture. USDA loans actually don't have any down payment requirement, but borrowers must have income below a certain percentage of the median income in their area. The home being purchased must also be the buyer's primary residence, and they must have a reasonable credit score, which will be determined by the lender, who will also consider debt-to-income ratio and other financial factors to approve or deny an application for a USDA loan.

4. VA

Finally, if you're looking to buy a home and you happen to be a veteran or active service member, you might qualify for a VA loan. Like USDA loans, VA mortgages have no down payment requirement (there will be a funding fee equivalent to a percentage of your home's purchase price, and it will be less if you can make some down payment, so just because it isn't required, doesn't mean it's not a good idea anyway). VA loans have some pretty neat features; surviving spouses can qualify for them, and you can use the mortgage program over and over again.

If you're worried that homeownership is out of reach for you because of how difficult it can be to save a down payment, don't despair. Research your options, which may include some or all of the above types of mortgage loans that come without stringent down payment requirements.

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