Can’t Afford a Down Payment? 5 Alternative Paths to Homeownership

@samanthavaughan / Twenty20.com

When financing a home, it’s usually a good idea to put down 20% as a down payment. This can result in a lower interest rate, better terms, and allows you to avoid paying private mortgage insurance.

See Our List: 100 Most Influential Money Experts
Related: Best Cities To Retire on a Budget of $1,500 a Month

Even so, it’s not always possible to put a full 20% down. But that doesn’t mean you can’t finance a home if you haven’t saved up the cash. There are several options for buyers, particularly first-time buyers with good credit, who have limited funds for a down payment or would rather save the money, according to Ruth Shin, founder and CEO of PropertyNest.

Below is a look at five alternative paths to homeownership when you can’t afford a down payment.

Government-Backed Mortgages

There are several mortgage programs backed by the federal government that allows homebuyers to put down very little or even nothing at all. For example, the FHA loan program, which is designed to help first-time homeowners, allows you to put down as little as 3.5% if your credit score is at least 580. If your score is between 500 and 579, you can put down as little as 10%.

Building Wealth

Loans backed by the Department of Veterans Affairs allow qualifying borrowers to put down nothing, as long as the home’s sales price isn’t higher than its appraised value.

And if you’re interested in living out of the city, a USDA loan may be a good choice. They’re designed to revitalize rural areas and are offered at 0% money down, “but you have to live in the area,” Shin said.

Dollar Homes

Another federal program that Shin said should be on your radar if you want to buy a house with no down payment is Dollar Homes. “These are homes that have not been sold for six months or more on the foreclosure market, as well as homes that were left abandoned by owners,” she explained. It’s in the government’s best interest to sell these as quickly as possible, so they’re often priced well below market value. This means you may be able to afford to buy one with cash, or with a minimal down payment. However, Shin said it’s important to note that most of these homes will need renovations.

Take Our Poll: Do You Have a Side Gig or Other Hustle?

Seller Financing

In some rare instances, sellers might want to sell their properties as quickly as possible. Shin said these sellers are often more open to flexible payment plans. If you’re a good negotiator, you might be able to finance a home through the seller. 

Seller financing, also known as owner financing, means a loan is issued directly by the seller instead of a financial institution. This allows you to cut out the middleman and many of the rules or restrictions that come along with traditional mortgages — including minimum down payment requirements.

Building Wealth

Rent-to-Own

A type of hybrid option between leasing and financing, rent-to-own agreements allow you to rent the home you want for a set amount of time. At the end of the agreed upon time period, you’re given the option to buy the house for yourself, often at a discounted rate. Shin noted that in most cases, a portion of your rent will be set aside to go toward a down payment for the home, though contract terms vary quite a bit.

Keep in mind that this can be an expensive option. You are usually required to pay an upfront “option fee,” which ranges between 1% and 5% of the purchase price. You may also be responsible for all of the maintenance and repairs for the property while you’re renting it. Plus, if you decide not to buy the home once the lease is up, you’ll likely forfeit any money paid up to that point.

Bridge Loan

A bridge loan (also called a gap loan) is a short-term financing option designed to bridge the gap between buying and selling a home. Because if you buy a home before your existing home has sold, you won’t have those proceeds to apply toward the new home’s down payment. 

Building Wealth

Common among real estate investors and nonprofit organizations, Shin noted that a good financial track record and a high amount of equity in your home make it easier to qualify.

More From GOBankingRates

Share This Article:

About the Author

Casey Bond is seasoned editor and writer who has covered personal finance for more than a decade. Currently, she is a reporter for HuffPost covering money, home and living. Previously, she held editorial management roles at Student Loan Hero and GOBankingRates. Casey’s work has also appeared on Yahoo!, Business Insider, MSN, The Motley Fool, U.S. News & World Report, Forbes, TheStreet and more.

Best Bank Accounts of August 2022

Untitled design (1)
Close popup The GBR Closer icon

Sending you timely financial stories that you can bank on.

Sign up for our daily newsletter for the latest financial news and trending topics.

Loading...
Please enter an email.
Please enter a valid email address.
There was an unknown error. Please try again later.

For our full Privacy Policy, click here.