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In recent years, the dream of homeownership has seemed increasingly out of reach for many potential buyers facing soaring real estate prices and interest rates. The 1% down mortgage offers a low down payment option, making homeownership more affordable for many buyers. However, only a few lenders offer this type of financing.
Let’s explore how 1% down mortgages work, benefits, potential drawbacks and who finances this low down payment mortgage option.
How 1 Percent Down Mortgages Work
A 1% down mortgage is a type of home loan where the buyer is only required to pay 1% of the home’s purchase price as a down payment. Compared to conventional mortgages, which usually require a 3% down payment, 1% down mortgages allow buyers who may not have the income or funds for a hefty down payment to achieve homeownership.
“These low down payment programs are valuable because lack of funds for a down payment has long been one of the most common barriers to buying a home,” said Kathy Cummings, senior vice president of homeownership solutions with Bank of America.
It’s important to understand these mortgages technically require more than 1% down. While the buyer is only required to pay 1% of the home’s purchase price, the lender must provide funds for 2% of the purchase price to achieve a 3% total down payment.
For example, if the home costs $400,000, the buyer would only need to provide $4,000 as a down payment compared to $12,000 with a 3% minimum down payment. The remaining 99% of the home’s cost is covered by the mortgage loan.
Qualifying For a Low Down Payment
To qualify for a 1% down payment, you will need a modest income and a good credit score. But what exactly does that mean?
Most lenders usually look for a FICO credit score of 620 or higher and an income at or below 80% of the area median income (AMI) where you are looking to purchase a home. Fannie Mae has an AMI lookup tool you can use to easily find the median in your area.
It’s important to understand that lenders may set their own requirements and other restrictions with low down payment loans.
Low Down Payment Mortgage Lenders
Only a handful of lenders offer 1% down mortgages due to the associated risk and financing involved. Let’s take a look at the top lenders who offer this loan.
Rocket Mortgage 1 Percent Down
Rocket Mortgage’s 1% down mortgage program is called ONE+. The mortgage program is available to borrowers who have:
- An income of 80% or less than the area median income
- A minimum credit score of 620
The ONE+ mortgage also doesn’t require borrowers to pay for private mortgage insurance, which is generally required for conventional loans with a down payment below 20%. It’s important to know there’s a $350,000 upper loan limit for this option and is only for single-unit primary residences.
A perk of the program is that you can make a larger down payment and still receive the 2% grant from Rocket Mortgage, allowing for a combined down payment of up to 5%. However, the maximum grant amount Rocket will provide is $7,000.
UWM 1 Percent Down
The United Wholesale Mortgage 1% down mortgage is typically referred to as the Conventional 1% Down. This mortgage is limited to those who have:
- An income of 80% or less than the area median income
- A minimum credit score of 620
The grant provided by UWM has a cap of $4,000. So, borrowers may need to put more than 1% down to meet the total down payment of 3% with the UWM grant.
It’s important to understand this mortgage option requires private mortgage insurance, and you must use a mortgage broker since UWM is a wholesale mortgage lender.
Zillow Home Loans 1 Percent Down
Zillow Home Loans’ mortgage is currently only available in Arizona. Similar to other 1% down mortgages, Zillow provides an additional 2% down payment, totaling 3% down. Details and requirements for this program have not been released by Zillow.
» MORE: See today’s refinance rates
Other Low Down Payment Options
There are still plenty of other loans that come with low down payments. If your credit score is at least 580, you can qualify for an FHA loan with a down payment of just 3.5% of your home’s purchase price. If you’re a Veteran, active member of the U.S. military or a surviving spouse, you can apply for a VA loan that requires no down payment at all. USDA home loans also require no down payments, though you usually must buy in a rural area.
Fannie Mae and Freddie Mac also offer programs that allow borrowers to buy a home with as little as 3% down.
“The concept that you ever ‘needed’ 20% down is an old wives’ tale meant to scare people from buying,” said Brian Koss, executive vice president of Mortgage Network Inc. in Danvers, Massachusetts.
There is a catch, though. Rick Sharga, executive vice president of Irvine, California-based online real estate marketplace Ten-X, said that borrowers might need better credit scores and higher income levels to qualify for a loan with a lower down payment.
“If you’re not going to make a large down payment, you’d better have excellent credit, a reliable source of income and a good employment history,” Sharga said. “Lenders do not like taking excessive risk today.”
Consider all your options, but it’s also important to act fast in order to capitalize on the lowest rates possible.