Mortgages With Low Down Payments: What Each Type Costs You

What low down payment mortgages are and how they work

A low down payment mortgage lets you buy a home while putting down less than the traditional 20 percent. Most lenders will accept 3 to 5 percent down, and some programs go as low as zero percent. The tradeoff is that you pay more over time: a smaller down payment means a larger loan, higher monthly payments, and almost always an additional fee called mortgage insurance that protects the lender if you stop paying.

The lender fronts the difference between your down payment and the home price. If you put down 5 percent on a $300,000 home, the lender covers $285,000. That extra risk is why mortgage insurance exists — it's not optional on loans where you put down less than 20 percent, and it typically costs 0.5 to 1.5 percent of your loan amount per year, added to your monthly payment.

The main types of low down payment mortgages are conventional loans with mortgage insurance, FHA loans, VA loans (if you're military), and USDA loans (if you're buying in a rural area). Each has different insurance costs, credit score requirements, and rules about what kind of property you can buy.

Key Takeaways

• Mortgages with down payments below 20 percent require mortgage insurance, which adds 0.5 to 1.5 percent of your loan amount to your monthly payment.
• Conventional loans with 5 to 10 percent down are fastest to close but have the strictest credit requirements and highest insurance costs.
• FHA loans accept credit scores as low as 580 and down payments of 3.5 percent, but the insurance stays on the loan for its entire life if you put down less than 10 percent.
• VA and USDA loans may require zero down payment and have no mortgage insurance, but you must meet specific may be able to access rules.
• The lowest monthly payment isn't always the best deal — a loan with higher upfront costs might cost less over 30 years.

Conventional loans with mortgage insurance

A conventional loan is a mortgage that isn't backed by the federal government. You can put down as little as 3 percent, though 5 to 10 percent is more common. The lender sets the terms based on your credit score, income, and the property itself.

Mortgage insurance on a conventional loan is called PMI (private mortgage insurance). The cost depends on your credit score, how much you're putting down, and the size of the loan. With a 5 percent down payment and a credit score around 740, PMI typically runs 0.5 to 0.7 percent per year. With a lower credit score or smaller down payment, it can reach 1.5 percent or higher. On a $300,000 loan, that's $1,500 to $4,500 per year added to your monthly payment.

The advantage of PMI is that you can remove it once you've paid down the loan to 80 percent of the home's original value — usually after 8 to 12 years of payments. You can also remove it sooner by refinancing or by paying down the principal faster. Conventional loans also close faster than government-backed loans, sometimes in 21 days instead of 45.

FHA loans

An FHA loan is backed by the Federal Housing Administration. It accepts credit scores as low as 580 (compared to 620 for most conventional loans) and allows down payments as low as 3.5 percent. If you have a lower credit score or limited savings, this is often the easiest path to a mortgage.

FHA loans require two types of insurance. Upfront mortgage insurance is 1.75 percent of the loan amount, paid at closing (you can roll it into the loan). Annual mortgage insurance runs 0.55 to 0.8 percent per year depending on your down payment and loan size. On a $300,000 loan with 3.5 percent down, you'd pay roughly $5,250 upfront plus $1,650 to $2,400 per year.

The catch: if you put down less than 10 percent on an FHA loan, the annual insurance stays on for the life of the loan — you cannot remove it. If you put down 10 percent or more, it drops off after 11 years. This makes FHA loans more expensive long-term if you're putting down 3.5 to 10 percent, but they're still the best option for buyers with lower credit scores or less cash saved.

VA loans and USDA loans

If you served in the military, a VA loan may let you buy with zero down payment and no mortgage insurance at all. Instead, you pay a one-time VA funding fee (1.4 to 3.6 percent of the loan amount, depending on your service and down payment). You can roll this fee into the loan, so you don't need cash at closing. VA loans also have no credit score minimum, though most lenders require 620 or higher.

The tradeoff is that VA loans take longer to close — typically 45 to 60 days — because the VA must verify your service. You also cannot use a VA loan to buy an investment property; it must be your primary residence. If you're may be able to access, though, VA loans are usually the cheapest option because there's no ongoing mortgage insurance.

USDA loans work similarly for rural homebuyers. You can put down zero percent and pay no mortgage insurance, only a one-time may provide fee (1 to 3.6 percent). You must be buying in a USDA-may be able to access area (most rural counties may have access to, but not suburbs) and meet income limits that vary by county. Like VA loans, USDA loans take 45 to 60 days to close.

How to compare the real cost of each loan type

The monthly payment is only part of the cost. To compare fairly, calculate the total amount you'll pay over 30 years, including all insurance and interest. A loan with a lower monthly payment might cost thousands more overall if the insurance lasts longer or the interest rate is higher.

Use a mortgage calculator that lets you enter the down payment, interest rate, and insurance costs for each loan type. Most lenders' websites have these tools. Run the numbers for conventional, FHA, and VA or USDA (if you're may be able to access) with the same down payment amount. The difference over 30 years often surprises people.

Also factor in how long you plan to stay in the home. If you're selling in 7 years, PMI removal doesn't matter — you'll pay it the whole time. If you're staying 30 years, removing PMI after 10 years saves tens of thousands. The "best" loan depends on your timeline, credit score, and how much you can put down.

Interest rates and credit score impact

Lenders charge higher interest rates for lower down payments and lower credit scores because the risk is higher. A conventional loan with 5 percent down and a 740 credit score might be 0.25 to 0.5 percent higher than the same loan with 20 percent down. An FHA loan with a 580 credit score might be another 0.5 percent higher still.

That small difference in interest rate adds up. On a $300,000 loan, a 0.5 percent higher rate costs roughly $150 per month, or $54,000 over 30 years. Before you commit to a loan, get rate quotes from at least three lenders and compare the full picture: interest rate, insurance costs, and closing costs.

If your credit score is below 620, FHA is usually your only option. If it's between 620 and 680, compare FHA and conventional carefully — FHA might have a lower rate but higher lifetime insurance costs. If it's above 700, conventional loans are usually cheaper.

Down payment assistance and low down payment mortgages

Some down payment assistance programs work alongside low down payment mortgages. For example, you might use a grant or forgivable loan to cover your 3 to 5 percent down payment, then finance the rest with an FHA or conventional loan. This means you're borrowing less overall, which lowers your monthly payment and insurance costs.

Other programs are structured differently — they might help you pay mortgage insurance or closing costs instead. The interaction between assistance and your mortgage choice matters. If a program gives you $20,000 toward your down payment, putting that money down reduces your loan size and insurance costs more than using it to pay closing costs would.

When you're comparing assistance programs, ask each one how their money works with different loan types. Some programs have restrictions — for example, they might only work with FHA loans, or they might require you to use a specific lender.

Frequently Asked Questions

Can I remove mortgage insurance from an FHA loan?

Only if you put down 10 percent or more. If you put down less than 10 percent, the insurance stays for the life of the loan. You can refinance into a conventional loan once you've built enough equity, but that's a separate transaction with its own closing costs.

What credit score do I need for a conventional loan with low down payment?

Most lenders require 620 to 640 for a conventional loan with less than 20 percent down. Some will go as low as 580 with a larger down payment (10 percent or more). FHA accepts 580 with as little as 3.5 percent down, making it the easier path if your score is below 620.

Is it better to put down 5 percent or 10 percent?

It depends on your loan type and timeline. With a conventional loan, 10 percent down usually lowers your interest rate and insurance costs enough to offset the extra cash you're putting down. With an FHA loan, the difference is smaller because insurance stays on either way if you're keeping the loan long-term.

Do VA and USDA loans really have no mortgage insurance?

Correct — they have no ongoing mortgage insurance. VA loans charge a one-time funding fee, and USDA loans charge a one-time may provide fee. Both are typically rolled into the loan, so you don't need cash at closing. The tradeoff is longer closing times and may be able to access restrictions.

Should I choose the loan with the lowest monthly payment?

Not necessarily. A loan with a lower monthly payment might have higher insurance costs or a higher interest rate that costs more over 30 years. Calculate the total amount paid over your expected time in the home, not just the monthly number.