How much house can you afford to buy? Probably more than you think.

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Updated Nov. 5, 2018.

“How much house can I afford?” is the big question on the mind of every homebuyer. These days, buying is often cheaper than renting. Plenty of mortgage programs also require a low or no-down-payment. The only way to find out how much you can afford is by getting prequalified. And once you do, you’ll be able to house-hunt more effectively.

Who can afford to buy?

Sixty-six percent of renters say owning a home is a critical part of The American Dream. So, what’s holding them back? The prequalification part is easy: Just download an app or submit your info online. Then you’ll get that “magic number” of how much home loan you prequalify for. That’s your housing price range.

If it’s not prequalification, considering that qualifying for a mortgage has gotten much easier, maybe it’s the down payment. You know how much house you can afford, but do you have enough upfront cash to buy it? The answer is: Most likely. Sixty-one percent of first-time buyers put less than 6 percent down. More than half of all buyers put down less than 20 percent.

Busting that 20-percent myth can make homeownership much more affordable. Denise Supplee, realtor with Long & Foster in Pennsylvania, investor, experienced landlord, and real estate educator at SnapLandlord.com, says, “I work with many first-time home-buyers. So often, the assumption is that 20 percent is needed as a down payment in addition to the closing costs. For that reason, many do not even venture out to try and buy.”

“I am amazed at how few people even realize the various programs that are available,” Supplee says.

Meeting with a mortgage lender is an easy way to find low-cost loan programs that can help get you into a new place.

What are the cheapest loan options for homebuyers?

When in doubt, ask your lender.

They’ll give you your low and no-down-payment loan options that can make it easier for you to buy:

1. USDA

A USDA loan only works in rural areas, so larger population regions are off-limits. Dan Green, founder of Growella, a financial education website, provides his map of nationwide USDA loan eligibility here. A USDA loan requires no down payment and allows the seller to pay up to 6 percent of closing costs and prepaids. Even better, a USDA loan does not require private mortgage insurance, only a one-time guarantee fee and an annual guarantee fee paid monthly as part of a mortgage payment.

However, there are income requirements for these state bond programs. “If you use bond money, there is a period of time before you can sell or rent the house outright,” Brett Maternowski, Tampa-based realtor at Dalton Wade Real Estate Group, adds.

Maternowski describes an ideal scenario using a USDA home loan as this: seller concessions pay closing costs, and the state bond program gives a buyer free money to put down. “The state bond program can give grants to cover down payments and closing costs. This could not only cover the USDA guarantee fee but also reduce what you owe on the loan,” he explains.

Estimated Down Payment: No minimum.

2. VA

Homebuyers who have currently or previously served in the military may gravitate toward the no-money-down VA home loan. Up to 100 percent financing, backed by the Department of Veterans Affairs, may be available for those who qualify. A VA loan also has flexible credit requirements. As a note, a funding fee of up to 2.15 percent for first-time buyers and up to 3.3 percent for subsequent buyers may apply, contingent on details like military branch and the number of times of a VA loan has been used. Fortunately, a VA loan funding fee can be rolled into the total loan balance.

“Buyers with military experience should always consider the VA loan, regardless of their down payment size, because of low rates and because mortgage insurance isn’t required,” Green says.

Estimated Down Payment: No minimum.

3. Good Neighbor Next Door

The Good Neighbor Next Door Program was made for the helpers among us. Firefighters/emergency responders, nurses, teachers, and police officers who meet loan program requirements may be eligible to buy HUD Homes at half-price. An HUD Home is a foreclosed home financed by the FHA, currently owned by HUD. Eligible buyers who finance their mortgage using an FHA loan may drop the down payment significantly — to as low as $100. The Good Neighbor Next Door Program allows for a second mortgage purchase of a foreclosed HUD Home, without any interest or payments. The only requirements? A buyer must choose an approved property on the HUD list and live in a home for at least three years.

Estimated Down Payment: As little as $100.

4. HomeReady®

For eligible buyers, it could be possible to get into the home you have your eye on for as little as a 1 percent down payment. The HomeReady® mortgage offered by Fannie Mae works when purchasing different types of one-unit primary residences, like single-family homes, condos, and planned unit developments. With this type of loan, manufactured homes and high-balance mortgages are ineligible. When requirements are met, financing may be available for up to 105 percent of a home’s purchase price.

Estimated Down Payment: 1 percent minimum.

5. FHA

FHA loans are popular among first-time buyers since they require less money down and have more lenient credit requirements. In most circumstances, the FHA mortgage only necessitates a 3.5 percent minimum down payment. According to Green, buyers with credit scores below 720 typically find the FHA loan to be more affordable.

“Add in a seller’s concession to assist with closing costs, and voila! Home purchasing is now within reach,” Supplee says.

Estimated Down Payment: 3.5 percent minimum.

6. Conventional

Most homebuyers have heard of this loan before. A conventional home loan is the most common mortgage option that normally offers the most competitive interest rates. Repeat buyers may be eligible for a 5 percent minimum down payment or as little as 3.5 percent down, in some cases. A conventional mortgage, nevertheless, is where the “20 rule originated.” A 20 percent down payment is standard. Overall, homebuyers with credit scores above 720 are generally suited to conventional loans, such as the Conventional 97, Green says.

Estimated Down Payment: 3-5 percent minimum.

7. Down Payment Assistance

Down Payment Assistance loan programs can help to fund a mortgage down payment, with examples that include grants, tax credits, and second mortgages. “All homebuyers should check for down payment assistance programs in their area,” Green says. “Some buyers can get up to $25,000 in grant money from their city or county for buying a home, with the stipulation that the homebuyer stays in the home for five years or more. If the [eligible buyers] can stay for at least five years, the grant doesn’t need to be paid back.”

Estimated Down Payment: Funding varies for 3.5 percent minimum.

8. Rental income

This option may not be the right choice for all homebuyers, but it does present possibility. “My favorite low money down homebuying strategy is to ‘house hack,'” Glenn Carter, real estate investor and expert at Condo.Capital, says. “You need the initial 5 percent minimum down to buy the house, but after that, the home will pay for itself if you implement the strategy correctly. You find a 3 to 4-bedroom home in an area close to downtown amenities, post-secondary schools, or local industry. Then take one room for yourself, and rent out the others. The extra income from the tenants will more than offset the mortgage, taxes, etc.” Carter says that, in some cases, he’s seen this strategy bring in extra income and act as a part-time job.

Estimated Down Payment: Varies to meet individual loan requirements.

With the many low and no-down-payment mortgage options out there, the 20-percent myth has officially been busted. Putting up to 20 percent down on a home is a wise choice if you have the cash available. But a number doesn’t have to hold you back. 

Start by talking to your lender to find out your options. Then, set reasonable expectations about how much you can save. “The first tip for beginning to save is to start,” Raeshal Solomon, family finance author and speaker at My Little Banker, explains. “For some people, starting means to write a plan that details the amount of money for them to save. For other people, starting means setting up an automatic transfer from one account to another.” People often make the topic of money more difficult than it is, Solomon says. “The key to money and saving is to do. Saving is all about taking action.”

Most of the time, you’ll be saving less than you think. Click here to find out how much house you can afford and to pick a mortgage program that’ll keep your down payment to a minimum.

For educational purposes only. Please contact your qualified professional for specific guidance. 

Sources are deemed reliable but not guaranteed.