1% Down Payment Mortgage: Pros, Cons, Eligibility, and How It Works (2024)

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Down payments have long been a major hurdle separating cash-strapped renters from the world of homeownership. But as buying a home has only gotten less affordable in recent years — and mortgage rates have soared, lenders have had to get creative to widen their pool of prospective borrowers.

The 1% down mortgage is just one of these creative strategies. As the name suggests, this lets borrowers get into a home with just 1% of the purchase price and can make homeownership more accessible for many.

But before you use one (or go searching for one), it's important to understand exactly how these mortgages work and whether they make sense for your needs and future plans. Here's what you need to know.

What is a 1% down payment mortgage?

Typically, the lowest down payment you can make on a conventional mortgage is 3%. Some government-backed mortgages allow no down payment, but these loans are only available to borrowers who meet specific eligibility criteria (like being a military member or veteran, for instance).

For those that don't fall into those specific categories, a 1% down mortgage can be a good fit.

Low down payment loan

A 1% down mortgage is a loan that allows you to make a down payment of just 1% of the home's purchase price. So, if the home costs $300,000, your down payment would be just $3,000. That's a lot of savings compared to the traditional 3% you need (that would amount to a $9,000 down payment)

Conventional loan

Most 1% down mortgages are conventional loans, which are loans backed by Fannie Mae and Freddie Mac. Technically, these require a 3% minimum down payment, so when a lender offers a 1% down payment conventional loan, they're also offering to foot the bill for the remaining 2%.

In the above example, that'd mean you'd pay $3,000 of the down payment, and your lender would cover the remaining $6,000.

Assistance programs

Some 1% down payment mortgages are offered through special community programs or lenders that offer down payment assistance. With these, the program or lender offers a grant for the remaining 2% of your down payment or, in the case of lenders, provides credits toward your closing costs to make up for them.

Pros and cons of 1% down payment mortgages

A 1% down payment mortgage can sound pretty nice, but there are downsides too. Here are the pros and cons to consider before taking one of these loans out.

Pros

• Lower barrier to entry: When your loan requires just 1% down, you'll spend less to get into a home. This could also free up more cash flow for your household and ease financial stress.
• Faster homeownership: You won't have to spend as many years saving up when you need just 1% down. This could allow you to buy a home much sooner than expected.
• Potential for appreciation: When you get into a home earlier, you have more time to build equity and see financial gain from your home's appreciation.

Cons

• Higher interest rates: Because you have less financial skin in the game, 1% down mortgages are slightly riskier than loans with larger down payments. Lenders may compensate for this with higher interest rates.
• Private mortgage insurance: You'll usually need to pay for private mortgage insurance (PMI) when you make a small down payment. This increases your monthly payment.
• Limited lender options: Not many lenders offer 1% down mortgages. You may only have a few companies to choose from.

How to get a 1% down payment mortgage

Think a 1% down payment mortgage could be your path to homeownership? Here's how to buy a house with 1% down.

Find a participating lender

Research mortgage lenders, and check with banks and credit unions in your area. Not many banks offer these, so you may need to check with specialty lenders or online mortgage companies for the most options. Make sure to ask about first-time homebuyer programs, too, as these often come with lower down payment requirements.

Meet eligibility requirements

Once you find a lender, verify the qualifying requirements you'll need to meet. These should include a minimum credit score, a maximum debt-to-income ratio, and a maximum loan-to-value ratio.

Explore assistance programs

You can also look into assistance programs that offer grants or credits that can help with your down payment challenges. These are often offered through local housing departments or community organizations.

Alternatives to 1% down payment mortgages

If you don't qualify for one of these 1% down mortgages or aren't sure they're the right fit for you, there are plenty of other affordable options that come with low or no down payments.

FHA loans

There are low down payment mortgages backed by the Federal Housing Administration. They require a down payment of just 3.5% and come with less stringent credit requirements, including a minimum credit score of just 580.

VA loans

These mortgages are backed by the Department of Veterans Affairs and are available to current servicemembers and veterans who meet minimum service requirements. They require no down payment and no mortgage insurance.

USDA loans

These are mortgages guaranteed by the Department of Agriculture. They enable low-to-middle income borrowers in eligible rural or suburban areas to buy a home with no money down. You can use the USDA's eligibility map to see if you're in a designated "rural" area.

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