If you can’t afford a down payment on a house, you have more options than the old 20% rule suggests. Qualifying veterans and buyers in eligible rural areas can put nothing down. Most other buyers can get in with 3% to 3.5%. Family gift funds, state and local assistance programs, seller-paid closing costs, and, as a last resort, retirement account strategies can close the rest of the gap. The right combination depends on where you’re buying, what you earn, your credit score, and how long you plan to stay.
Zero-Down Loans If You Qualify
Two federal programs let eligible buyers skip the down payment entirely.
VA Loans
If you’re an eligible veteran, active-duty service member, or surviving spouse, the Department of Veterans Affairs backs purchase loans with no down payment and no monthly mortgage insurance.1Veterans Affairs. Purchase Loan That combination makes VA the most cost-effective zero-down loan available.
Most VA borrowers do pay a one-time funding fee between 1.25% and 3.3% of the loan amount, which can be rolled into the loan.2Federal Deposit Insurance Corporation. VA Home Purchase Loan Program Veterans with a service-connected disability, surviving spouses receiving Dependency and Indemnity Compensation, and Purple Heart recipients are exempt. The VA sets no minimum credit score, though most lenders want to see around 620.3Veterans Affairs – VA.gov. VA Funding Fee and Loan Closing Costs
USDA Loans
The U.S. Department of Agriculture also offers zero-down financing for homes in eligible rural and suburban areas.4Rural Development U.S. Department of Agriculture. Single Family Housing Direct Home Loans The definition of rural is broader than most people expect, and many small towns and outer suburbs qualify. You can check any specific address through the USDA’s property eligibility tool before you start shopping.5United States Department of Agriculture, Rural Development. Eligibility – Welcome to the USDA Income and Property Eligibility Site
Income is the tighter constraint. For the direct loan program, your household income can’t exceed 80% of the area median, and the USDA counts every adult in the household, not just the borrowers on the mortgage.
Low Down Payment Loans For Everyone Else
If you don’t qualify for VA or USDA, the choice usually comes down to FHA at 3.5% or a conventional loan at 3%. The monthly payments can look similar at first glance. The long-term cost isn’t.
FHA Loans at 3.5% Down
The Federal Housing Administration insures mortgages with down payments as low as 3.5% for borrowers with a credit score of at least 580.6U.S. Department of Housing and Urban Development (HUD). Helping Americans Loans Scores between 500 and 579 require 10% down. On a $300,000 home, the 3.5% minimum is $10,500.
Every FHA loan carries an upfront mortgage insurance premium of 1.75% of the loan amount, which most borrowers roll into the balance rather than pay at closing.7U.S. Department of Housing and Urban Development. Appendix 1.0 – Mortgage Insurance Premiums There’s also an annual premium, paid monthly. For a 30-year loan under $726,200 with less than 5% down, the annual rate is 0.55% of the loan balance.
Here’s the part that surprises most buyers. If you put down less than 10% on an FHA loan, the mortgage insurance stays on the loan for its entire life. You can’t cancel it. The only escape is refinancing into a conventional mortgage once you build enough equity, which means paying closing costs a second time.
Conventional Loans at 3% Down
Fannie Mae and Freddie Mac both back mortgages with as little as 3% down. Fannie Mae’s HomeReady requires a minimum 620 credit score and caps borrower income at 80% of the area median.8Fannie Mae. HomeReady Low Down Payment Mortgage Freddie Mac’s Home Possible carries the same 3% down and 80% AMI limits.9Freddie Mac Single-Family. Home Possible
If your income exceeds those limits, Fannie Mae’s standard 97% loan-to-value option is available to any first-time buyer with a 620 credit score, restricted to 30-year fixed-rate mortgages.10Fannie Mae. FAQs: 97% LTV Options
Why the Mortgage Insurance Difference Matters
Private mortgage insurance on a conventional loan usually runs 0.5% to 1.5% of the loan amount per year, based on your credit score, down payment, and loan term.11Freddie Mac. Breaking Down Private Mortgage Insurance (PMI) On a $300,000 loan at 0.7%, that’s about $175 a month.
The key advantage is that conventional PMI goes away. Under the Homeowners Protection Act, your lender must automatically cancel PMI once your loan balance is scheduled to reach 78% of the home’s original purchase price.12CFPB Consumer Laws and Regulations. Homeowners Protection Act (PMI Cancellation Act) You can request cancellation earlier at 80% with a good payment history and evidence the home hasn’t lost value.13National Credit Union Administration. Homeowners Protection Act (PMI Cancellation Act)
The Homeowners Protection Act doesn’t apply to FHA loans. FHA’s monthly premium is often lower than conventional PMI at the same credit score, but conventional PMI ends and FHA insurance doesn’t. Over ten or fifteen years, the conventional loan typically wins by thousands of dollars. If your credit score is 620 or above, get quotes on both before choosing.
Down Payment Assistance Programs
Thousands of state and local programs are built specifically to cover part or all of a buyer’s down payment. State housing finance agencies and municipal governments run them, and they stack on top of the mortgage programs above.
The two most common formats are outright grants and forgivable second mortgages. A forgivable second, sometimes called a silent second, is a subordinate loan for your down payment or closing costs that carries no interest and no monthly payments. Stay in the home for the program’s set period, commonly five to fifteen years, and the balance is forgiven. Sell or refinance early and you repay the assistance from the sale proceeds.
Eligibility usually hinges on income limits and first-time homebuyer status. For most programs, “first-time homebuyer” covers anyone who hasn’t owned a principal residence in the three years before the purchase.14U.S. Department of Housing and Urban Development (HUD Archives). HUD HOC Reference Guide – First-Time Homebuyers Prior ownership years ago doesn’t disqualify you.
Ask your lender or housing counselor about one wrinkle before closing: if your mortgage is funded through a qualified mortgage bond or mortgage credit certificate, selling in the first nine years can trigger a federal recapture tax that increases your federal income tax for the year of sale. The amount depends on your gain and how long you owned the property, and IRS Form 8828 is used to figure it.15Internal Revenue Service. Instructions for Form 8828 Recapture of Federal Mortgage Subsidy
Gift Funds From Family
Family gifts are a legitimate and common source of down payment money. Lenders allow them but examine the transfer closely to make sure it’s genuinely a gift, not a disguised loan that would add to your debt. Expect to provide a signed gift letter from the donor confirming no repayment is expected, documentation that the donor had the capacity to make the gift, and records tracing the funds from the donor’s account into yours.
Any large non-payroll deposit greater than 50% of your total monthly qualifying income triggers additional verification. The lender must document the source before those funds count toward your down payment or reserves.16Fannie Mae. Depository Accounts Undocumented deposits get deducted from your verified funds. Have the transfer done well before you apply, and keep a clean paper trail.
On taxes, the donor, not you, carries any gift tax exposure. For 2026, each person can give up to $19,000 per recipient per year without filing a gift tax return.17Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A married couple can together give $38,000 to a single recipient. Gifts above that require the donor to file a return but rarely produce actual tax owed thanks to the lifetime exemption. You owe nothing as the recipient.
Using Retirement Savings
Retirement accounts can supply down payment cash, but the costs go beyond the withdrawal itself.
IRA Withdrawals
Federal tax law waives the 10% early withdrawal penalty for first-time homebuyers who take up to $10,000 from a traditional IRA to buy a primary residence.18Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions The $10,000 is a lifetime cap, not annual.19Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The waiver only covers the penalty. You still owe regular federal and state income tax on the full withdrawal. In the 22% federal bracket, a $10,000 withdrawal costs roughly $2,200 in federal tax alone.
Roth IRAs are more flexible. Your own contributions come out any time, tax-free and penalty-free, because they were made with after-tax dollars. Earnings can also be withdrawn penalty-free up to $10,000 for a first home, though earnings from a Roth open less than five years may still owe income tax.
401(k) Loans
Many 401(k) plans let you borrow against your vested balance instead of taking a taxable withdrawal. The federal limit is the lesser of 50% of your vested balance or $50,000.20Internal Revenue Service. Retirement Topics – Plan Loans Repayment runs through payroll deductions, and while the standard window is five years, loans used to buy a primary residence can extend longer.
The risk is job loss. If you leave your employer, voluntarily or not, the plan sponsor can demand full repayment of the outstanding balance. If you can’t pay, the remaining amount becomes a taxable distribution with the 10% early withdrawal penalty on top if you’re under 59½.20Internal Revenue Service. Retirement Topics – Plan Loans You can avoid that by rolling the balance into an IRA before your tax filing deadline, but that requires cash you already have somewhere else. Buyers who tap a 401(k) loan and then change jobs within a year or two often get hit with an unexpected tax bill.
Seller Concessions to Protect Your Cash
Even with a low down payment, closing costs stack up: appraisal, title search, lender origination fee, recording fee, and prepaid property tax and homeowner’s insurance. Negotiating for the seller to cover some of these preserves your cash for the down payment itself.
Loan type caps the contribution. Conventional loans with less than 10% down allow up to 3% of the sale price in seller concessions.21Fannie Mae. Interested Party Contributions (IPCs) Conventional loans with 10% to 25% down allow up to 6%. Above 25% down, up to 9%. FHA permits up to 6% regardless of down payment.22U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook 4000.1 Anything past the cap gets treated as a price reduction, forcing the lender to recalculate your loan-to-value at the lower price.
In a slow market, sellers are more open to concessions. In a competitive market, asking makes your offer weaker. Some buyers offset that by offering slightly more and asking for concessions back. The net cost is similar and the cash stays in your pocket at closing. The appraisal still has to support whatever price you agree on.
Plan for the Homebuyer Education Requirement
Several low-down-payment programs require you to complete a homebuyer education course before closing. Fannie Mae’s HomeReady and its standard 97% loan-to-value option require at least one borrower to finish an approved homeownership course when all occupying borrowers are first-time buyers.23Fannie Mae. HomeReady Mortgage Many state and local down payment assistance programs impose similar rules.
The courses cover budgeting, credit, mortgage products, and home maintenance. They run through HUD-approved counseling agencies or online providers and generally cost under $100. They’re short, but waiting until the last minute can push back your closing, and they occasionally surface local assistance programs you’d otherwise miss.