Whether you’re a first-time buyer or on the hunt for your next house, saving for a down payment takes preparation. To determine your target savings goal for your situation, research the price of homes in your market and your budget to calculate what you can realistically afford.
The traditional down payment cost for a conventional loan is 20%, and usually allows borrowers to avoid paying for private mortgage insurance (PMI). If you opt to put down less than the typical 20%, you’ll have to account for the PMI cost in your monthly mortgage payments. Whereas a larger down payment will reduce the risk for the lender and offer long-term benefits like better interest rates and more favorable loan terms.
There are a number of ways to get a down payment for a house. In this article, you’ll learn what your options are to decide which route is the best way to help you on your journey to homeownership.
1: Saving for a down payment
The earlier you can start setting money aside for a down payment, the better position you’ll put yourself in for negotiating and standing out in a crowd of other buyers. Consider setting up a separate high-yield savings account to put money into so you’re not tempted to take any out. There is “no one size fits all” for the amount you’ll need to save, so it’s important to consider your current budget and the potential price of homes you may be interested in.
Using your savings is a great option for buyers who already have established savings in place or for buyers who aren’t in a rush to find a new home. The longer you have to save, the better, as sellers are more likely to prefer buyers who have at least a twenty percent down payment. The bigger your down payment, the more likely your finances are in order, and you may have an easier time finding a mortgage lender.
- PMI is typically not required if you put down 20% or more
- Get a competitive edge over other buyers if able to put down at least 20%
- Lower monthly payments and rates
- The mortgage loan amount required will be lower
- More time needed to prepare and save
- Less money for repairs, other items, etc. if most of savings goes into the down payment
2: Using gift money for a down payment
It’s more common than you may think for homebuyers to reach out to family or friends for help buying a house. While there is no limit on how much a person can gift to you, you can only receive $15,000 tax-free per giver. And it’s not as simple as having them sign a check.
Even if they are family, there will be paperwork involved. The gift giver must provide a gift letter, and you’ll have to wait about 90 to 120 days before the funds are available for you to use. This is because most lenders require proof that the money has been in your account for at least three months. You must provide the exact dollar amount gifted, donor’s name, address, phone number, relationship to buyer, date of funds transfer, must state that no repayment is expected, property address, recipient and donor signatures in the gift letter.
- Gifts under $15,000 are tax-free
- Faster than saving on your own
- 90 to 120 day waiting period
- Requires a statement that no repayment is expected (excludes “borrowing” money from friends/family)
3: Getting down payment assistance
Federal, state, county, and private lender assistance programs exist to help buyers get the funding they need for a down payment. They can come in the form of grants, loans, and more. If you have a low income or you’re a first-time buyer, these programs are a great resource to help get your foot in the door of a new home. There are also grants available for teachers, nurses, law enforcement, first responders, government employees, military, and more. Be sure to research these based on your location, as eligibility and terms can vary.
While these types of grants and loans can help in the short term, it’s important to do your research and ensure you’re not signing on for extra costs later that may hurt you in the long run. Be sure to reach out to prospective lenders to inquire about the down payment programs they may be able to offer.
- Buy a home sooner than saving money yourself
- Keep more money in your pocket after closing
- May be able to avoid PMI (if you get enough to put down 20%)
- Could cost more over time if you use an interest-bearing loan
- Adds an extra step to the closing process
- Must qualify before receiving assistance
4: Borrowing from retirement for a down payment
The thought of borrowing from retirement for a large purchase like a down payment can be enticing, especially if you don’t have enough savings built up to cover the out-of-pocket costs. Many of these accounts even offer penalty-free or attractive loan options for homebuyers. However, in many cases, the risks and financial impact can cost significantly more in the long run. When considering using retirement accounts for the purchase of a new home, it’s best to speak with a financial planner to help evaluate your risk and determine the best option for you.
Can you use a 401(k) to buy a house?
Yes, but there are risks to withdrawing from these funds early. These drawbacks include penalties, taxes, potential repayment, and the long-term financial impact on your retirement savings. It’s also important to note that withdrawing funds from a 401(k) before age 59½ will incur a 10% early withdrawal penalty.
Can you use your IRA to purchase a home?
Another retirement fund you can technically use to put a down payment on a house is you IRA. Eligible homebuyers can withdraw from an IRA penalty-free, as the 10% penalty for withdrawing from an IRA prior to the age of 59½ is waived. The largest drawback is the costly impact on your retirement savings, including lost compound growth those funds would have earned over time.
Can you make a down payment with a credit card?
No, mortgage lenders will not accept a down payment via credit card. The primary reason lenders require a cash down payment is to demonstrate your financial responsibility and commitment to the investment. Additionally, several months' worth of bank statements are required to verify financial activity and ensure funds are available for closing.
5: Using equity for your down payment
If you already own a home, and the value is greater than the amount owed, it may be worth it to consider using your home’s equity to fund your down payment. However, accessing the equity will depend on your homebuying plans. For instance, if you are looking for a new primary residence and selling a property or land at the same time as you buy, you will need to complete the sale first to leverage the equity for a down payment on a new home.
- Avoids added debt
- No monthly payments or interest costs required
- Selling before you buy can be an inconvenience
- Added risk if either transaction falls through
- May require additional contingencies based on sale of buyer’s home
- In a competitive market, the contingency may be less enticing than offers without contingencies
If you do not plan to sell your property at the same time as buying, or are in the market for an investment property or vacation home, you can tap into your primary home’s equity to use for the down payment. A home equity loan or a home equity line of credit (HELOC) are options that can be used to access your equity to fund your down payment on the new property. There are several factors that will determine the amount of cash you are eligible to receive depending on the equity in the home and a lender’s requirements.
- Affordable HELOC and home equity interest rates
- Repay only what you use with a HELOC
- Typically, able to borrow up to 80% - 85% of your home’s equity
- Your home is collateral if loan is not paid back
- May have to pay fees
- Must be able to manage several payments
- Credit inquiry will impact credit score
6: Looking into low to no down mortgage options
Can you buy a house with low to no down payment? If you’re looking into buying a house with low to no money down, there are a few options out there. While the FHA does not offer zero down payment options, the VA does. For those in need of financial assistance, the government offers guaranteed mortgages that can help you secure a low-down payment. Unlike conventional mortgages, these government-backed loans are insured by government administrations and provided by approved lenders. It’s important to reach out to your prospective lenders to better understand the options available.
Entities like the United States Department of Veterans Affairs or the Federal Housing Administration work hard to provide borrowers with low to no down payment options and less restrictive credit score requirements. You may be eligible to apply for either a VA loan or an FHA loan.
- Zero to low down payment options
- Lower rates or low credit score requirements
- VA loans are only available to veterans, servicemembers, or their surviving spouses
- Mortgage insurance premium (MIP) typically required
- Total borrowed loan amount will be higher with no down payment
Down payments can feel like a big hurdle for homebuyers, but there are ways to ease your stress when it comes to finding the funds.