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A couple considering the pros and cons of a 1% down mortgage

The Pros and Cons of a 1% Down Mortgage

by The CE Shop Team

Buying a home has become prohibitively expensive for many people, due to ever-increasing home prices and high mortgage rates. Most homebuyers think they need to save 8-20% to put down on their mortgage, but this isn’t always the case. Putting down 1% on a home can save a homebuyer tons of anguish, and help them afford a home! Let’s take a look at the pros and cons of a 1% down mortgage. 

What is a 1% Down Payment Mortgage? 

Most often, 3% is the smallest amount you'll be able to put down on a home. In the past couple of years, it has been much more common for homebuyers to put down between 5-7%, or even 10-18%. So, what’s the life hack?  

In 2023, several lenders began experimenting with 1% down payment requirements. The idea is simple: homeowners within a certain credit range (typically no higher than 620), who also earn less than 80% of their area's median income, qualify for the program. The homebuyer pays 1% of the down payment, and the lender pays the other 2%, in the form of a grant. This deal has no strings attached, and never needs to be repaid — a huge opportunity for those with fewer means to buy a home! 

So far, these loans have been compared to Fannie Mae and Freddie Mac loan programs: HomeReady and Home Possible, for the flexibility they offer those with a low income or lower credit score looking to buy a house. If lenders see success with this program, there’s a good chance that more and more lenders will offer them! 

The Pros of a 1% Down Mortgage 

As somewhat of a lending experiment, the concept of putting 1% down is new for buyers and lenders alike. So, before we ask What could possibly go wrong?, let’s start with What could go right? 

1% Program Could Benefit Multiple Generations 

It’s been challenging for many people to buy a home in recent years — that's no secret. Times are tough, and have been for some time, leaving many families and individuals with few options for housing. Each generation would benefit from a 1% down mortgage program, but especially: 

Gen X: Generation X hasn’t had an easy road, between economic recessions, the Tech Boom and Bust of the ‘90s and early ‘00s, and the Housing Market Crash of ‘08. The ability to use a program like this would mean that Gen Xers can downsize to a home they can grow old in, with a lower down payment, and head into retirement feeling secure. 

Millennials: From compounding student debts to market crashes and recessions, to skyrocketing home prices and strict mortgage requirements, Millennials have had their fair share of financial burdens that have made homeownership challenging — or even impossible. Mortgage programs like this could make it possible for some to finally own their first home. 

Gen Z: Thankfully, the rules have begun to shift in favor of the youngest homebuying crowd: Gen Z. With less stringent down payment requirements, 1% down mortgage plans, HomeReady and Home Possible programs, and other grants and programs, younger generations are finding it easier to buy homes even in the face of turbulent economic times. 

Good Potential to Maximize Down Payment 

Who says a 1% down mortgage program has to be limited to 1%? If the buyers qualify for the program, but prefer to pay 3%, the lender can still give them 2%. That 3% down is now 5% — the max for most of these programs, so far. 

Great Potential For New Generation Homebuyers 

Being such a new program, there is still a world of potential for how it can help buyers make owning a home a reality.  

Many mortgage lenders have eyes on this 1% down mortgage project, to see if it works out and if there is incentive to try it themselves. If lenders like what they see, programs like these could become widely available, or even expand to include more groups of people. The opportunities are almost endless. 

The Cons of a 1% Down Mortgage 

Where there is sun, there are also shadows. And the numbers game of mortgage can be tricky. Here are some of the downsides to putting 1% down. 

Lenders May Cap Grants 

Unfortunately, the 2% down lender match is not a hard and fast rule (at least, while this is a new program). Some lenders, like Rocket Mortgage and UWM, cap their matched amount at $4,000. So, if you’re planning to buy a home priced higher than $200,000, you’ll have a little less home equity to start out with. 

Risk of “Underwater” Home 

A home "underwater” means that a property is worth less than what is owed on the loan. This can happen in a few ways. One example is when property values plummet, and you still have most of your loan to pay. It’s more likely to happen with smaller down payments, because you will have most of your loan amount left to pay off, plus interest.  

Being underwater itself isn’t necessarily a game-over scenario, but when there is a crisis like the housing bubble burst of ‘08, it could put homeowners in a less than ideal situation. 

Buyers Should Do Their Research 

Every homebuying process comes with research, so this isn’t a con on its own. The real “con” is the risk involved. 

As always, a good deal should be taken a grain of salt. One percent down mortgages are still uncommon, and while they may seem like an easy way to score a house, it might not be in your best interest. Make sure you’re getting a competitive rate and closing cost along with your 1% down to take full advantage of the program. 

Where To Get 1% Down & Other Mortgages 

Chomping at the bit to own your own home? Here’s where to go next. So far, there is a small group of lenders experimenting with 1% down mortgages: 

  • Zillow 

  • RocketMortgage 

  • United Wholesale Mortgage (UWM) 

If you don’t quite qualify for a 1% down mortgage, there are other options out there: 

  • VA Loan: Military members and veterans can put 0% down on a home 

  • FHA Loan: A great option for first-time homebuyers with a low credit score 

  • USDA Loan: Those in rural or suburban areas may qualify and put 0% down 

The 1% Down Mortgage Is One Step in The Right Direction 

Whether you put down 1%, 3%, or 18%, you’re moving in the right direction. But can you say the same about your career? Learn more about becoming a mortgage loan officer — a career that is always fresh, interesting, challenging, and pushes your skills to the next level. One step at a time. 

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