Buying your first home is an exciting milestone! But saving up enough money for a down payment can feel daunting for many first-time homebuyers. How much do you need to put down to purchase a house or condo? What loans and programs are available to help with down payments? This comprehensive guide covers everything you need to know about down payments as a first-time homebuyer.
How Much Money Do I Need for a Down Payment? A Guide for First-Time Homebuyers
What is a Down Payment and How Does it Work?
A down payment is the amount of money you pay upfront when purchasing a home, before taking out a mortgage loan for the remainder of the price. It's a percentage of the total home price that you pay at closing.
For example, if you purchase a $200,000 home and make a 10% down payment, you would pay $20,000 upfront. You would then finance the remaining $180,000 with a mortgage loan.
Down payments accomplish two main things:
- Equity: The down payment builds your ownership stake (equity) in the home right away. Instead of financing 100% of the price, you immediately own part of it.
- Lower monthly payments: The more you put down, the less you have to borrow. This means lower monthly mortgage payments. With a 20% down payment instead of 10%, your monthly costs go down significantly.
Down payments used to be 20% across the board. But today many loans allow much lower down payments for first-time home buyers.
How Much Do You Need for a Down Payment?
The amount you need for a down payment depends on the type of mortgage loan you get. Here are the down payment requirements for common options:
- Conventional loans: Usually 20% of the home price.
- FHA loans: As low as 3.5% of the home price.
- VA loans: 0% down payment for qualifying veterans.
- USDA loans: 0% down payment for properties in rural areas.
As a first-time buyer, you probably won't do a traditional 20% down conventional loan. FHA loans with 3.5% down are very popular for first-timers. VA and USDA loans also make homebuying possible with minimal savings.
Here are some examples of down payment amounts at 3.5% for different home prices:
- $200,000 home: $7,000 down payment
- $300,000 home: $10,500 down payment
- $400,000 home: $14,000 down payment
- $500,000 home: $17,500 down payment
As you can see, with an FHA loan you can get into a home for just several thousand dollars down. This makes homeownership attainable for buyers who don't have tens of thousands in cash saved up.
Where Does the Money Come From? Down Payment Sources
Once you know how much you need for a down payment, where does the money come from? Here are some common sources first-time homebuyers use:
Personal Savings
Ideally, you've been saving up for a down payment in your regular savings account, IRA, or other investment account. Personal cash savings should be your first stop for down payment funds. Even a few thousand dollars you've built up goes a long way.
Family Gifts
Many first-time buyers get help from the "Bank of Mom and Dad." Family can gift you money to put towards your down payment (and closing costs). There's no limit on family gifts used to purchase a primary residence.
Employer Assistance
Some companies offer down payment assistance as an employee benefit. Check if your employer has grants, matching contributions, or low/no-interest loans to help you buy.
Down Payment Assistance Programs
State and local governments, housing non-profits, and your mortgage lender may have special programs that provide grants, loans, or other help with down payments for first-time buyers. These programs have eligibility requirements like income limits.
HomeReady or HomePossible Loans
Fannie Mae HomeReady and Freddie Mac HomePossible conventional loans allow as low as 3% down payments. You also get discounted PMI insurance rates with these programs.
Personal Loans
Banks and online lenders offer personal loans that can provide funds for a down payment. Compare interest rates and weigh the pros/cons of using these for a down payment versus other options.
Down Payment vs. Closing Costs: What's the Difference?
In addition to the down payment, first-time buyers need to budget for closing costs. This includes origination fees, appraisal fees, title fees, and more. Closing costs add 2-5% of the total home price.
Down Payment - Money towards the purchase price, builds home equity
Closing Costs - Fees for processing/originating the loan and purchase
You'll need both the down payment AND estimated closing costs available by the time of closing. Work with your lender to determine the exact closing cost amounts. Both the down payment and closing costs can be gifted from the family.
Some common closing costs for buyers include:
- Origination/underwriting fees
- Appraisal fee
- Credit report fee
- Home inspection fee
- Attorney fees/title fees
- Home insurance premium
- Property taxes
- Interest (paid at closing for the first partial month)
When Do You Pay the Down Payment as a Buyer?
The down payment isn't due all at once when you first apply for a mortgage. Rather, it's paid at the very end during the closing process.
Here's the general timeline:
- Get pre-approved for a loan. You'll need to provide financial details to verify your income, assets, and credit health.
- Make an offer and enter under contract once it's accepted.
- During the closing period (typically 30-60 days), you'll complete inspections, obtain homeowners insurance, and finalize the loan.
- At closing, you wire or provide the down payment funds, and closing costs, and sign all final paperwork.
- Once closed, you get the keys and can move into your new home!
As you're saving up in preparation, keep the down payment funds in a safe but accessible place like an online savings account. You want the money handy so you can wire or get a cashier's check when it's time to close.
Tips for Saving for a Down Payment Faster as a First-Time Buyer
Patience and discipline are critical when building up your down payment fund. Here are some savvy tips to boost your savings:
- Automate it: Set up automatic transfers from each paycheck so the savings happen in the background.
- Lifestyle cutbacks: Downsize housing, transportation, and discretionary costs temporarily while saving. Avoid restaurants, vacations, and shopping sprees.
- Side gig income: Get a part-time job or freelance work for extra cash infusions. Dog walking, rideshare driving, tutoring, and delivering food are easy ways to make extra money.
- Sell stuff: Hold garage sales or sell unused electronics, furniture, equipment, jewelry, and more. Convert clutter into cash.
- Tax refunds: Put any federal or state tax refunds directly into your down payment savings.
- Gift requests: For birthdays/holidays, ask for gift cards or cash to help build your down payment fund instead of physical gifts.
- Loyalty programs: Cash in any credit card rewards, airline miles, hotel points, or other loyalty program currency.
With consistent contributions over time, your down payment savings add up faster than you think! Avoid withdrawing any funds along the way so the balance continues growing.
Low Down Payment Loan Programs for First-Time Homebuyers
Low down payment mortgage options are key for first-time buyer affordability. Here are the most popular programs:
FHA Loans
FHA loans only require 3.5% down and have flexible credit requirements. They make homeownership achievable for buyers with lower savings levels. You pay an upfront mortgage insurance premium and monthly premiums.
VA Loans
VA loans help military buyers (or surviving spouses) purchase with zero down payment. VA loans also don't require private mortgage insurance. Seller-paid closing costs are common with VA loans.
USDA Loans
For properties in rural/small town areas, USDA loans offer 0% down payments for low/moderate income buyers. Private mortgage insurance and flexibility on credit scores make these loans affordable.
HomeReady/HomePossible
Fannie Mae's HomeReady and Freddie Mac's HomePossible conventional loans allow down payments as low as 3%. You get discounts on mortgage insurance too. These programs have income limits in higher-cost areas.
Down payment assistance programs
Check with your state, county, city, employers, and housing nonprofits for special programs that provide grants, loans, or other help with down payment and closing costs.
The bottom line is you have options beyond just conventional 20% down mortgages as a first-time buyer. Explore these programs when talking to lenders to make your down payment amount fit your budget.
First-Time Home Buyer Down Payment Mistakes to Avoid
When saving and budgeting for your down payment, beware of these common mistakes:
- Not knowing your full down payment and closing costs. Get itemized estimates from your lender.
- Overlooking additional costs like moving expenses, new furniture, and renovations. Leave yourself a buffer.
- Trying to provide the down payment funds too early. Wait until the closing timeframe.
- Putting down payment money into risky investments like stocks or crypto. Keep it safe in FDIC-insured accounts.
- Relying on uncertain sources like family gifts, bonus income, or cashing out investments with penalties.
- Stopping retirement plan contributions to free up money. Don't sabotage future financial health.
- Using high-interest personal loans or credit cards as a down payment source. This adds significant costs.
- Placing the down payment in easily accessible accounts. Transfer it to closing accounts to avoid the temptation of spending it early.
- Not reading the fine print on down payment assistance programs. Understand payback terms if applicable.
Being informed about the process, avoiding shortcuts, and managing expectations will set you up for success. Patience and discipline now pay off tremendously long term when you become a homeowner.
Do You Need 20% Down to Buy a House?
20% down payments are not mandatory, despite most people thinking so. Most first-time buyers put down less than 20%. Here's what you need to know:
- Conventional loans typically require 20% down to avoid private mortgage insurance (PMI). However many buyers don't use conventional loans.
- FHA, VA, and USDA loans allow down payments between 0-3.5%. PMI is still required, but rates are lower.
- Conventional loans through HomeReady/HomePossible have options for as low as 3% down. You can get discounts on PMI too.
- Many down payment assistance programs specifically help first-time buyers reach the 3.5% FHA minimum.
Going with lower down payment loan options leads to higher monthly costs and paying PMI. But for most, the trade-off is worth it to get into the housing market sooner. As you gain equity over time, you can eventually refinance or no longer need PMI.
First-Time Home Buyer Checklist
To stay on track with down payments and ensure you're prepared to buy, use this checklist:
[ ] Research down payment amounts and loan types
[ ] Check credit reports and scores
[ ] Get pre-approved for a mortgage
[ ] Determine the target price range for homes
[ ] Start touring potential homes
[ ] Consult real estate agent and lender on process
[ ] Research down payment assistance programs
[ ] Make savings contributions automatic each month
[ ] Cut back discretionary costs to ramp up savings
[ ] Track all monthly expenses and budget diligently
[ ] Research closing costs and factor them in
[ ] Document all sources/accounts for down payment funds
[ ] Provide all required financial documentation to the lender
[ ] Evaluate home inspection reports carefully when under contract
[ ] Complete loan application and fulfill underwriting conditions
[ ] Maintain employment/income during process
[ ] Avoid new debts or credit checks before closing
[ ] Transfer down payment to linked accounts with lender
[ ] Review final CD with closing costs and down payment amount
[ ] Sign documents and wire down payment funds at closing
Following this methodical process will make your first-time home purchase smooth and successful. Being organized and ready with the down payment shows sellers and lenders you're a serious buyer.
Bottom Line on Down Payments for First-Time Homebuyers
Down payments used to be a huge hurdle, but today's options make buying much more accessible for first-timers. With low down payment mortgages, family help, and down payment assistance programs, homeownership is possible even with minimal savings.
Understand how much you need specifically for your financial situation. Set a realistic savings goal and timeline, then automate your contributions. Avoid spending down payment money once saved. Be meticulous with your monthly budget to maximize savings. Get educated on the process and available programs so you can find the optimal loan fit.
With the right preparation, saving diligence, and help from your support network, you'll be able to achieve the dream of homeownership sooner than you thought possible!
Buying a House with Little Money: Tips for Affording a Home
Owning a home remains a top priority for many Americans, even those with modest incomes and savings. The good news is that buying a house when you have limited funds is possible! It just takes more planning and a strategic approach. Here are smart tips for purchasing a home with minimal money down.
Opt for Low Down Payment Loan Programs
As outlined earlier, FHA loans allow down payments as low as 3.5%. Conventional loans through Fannie Mae and Freddie Mac also offer options around 3% down for first-time buyers. VA and USDA loans go even further with 0% down programs. Leverage these low-down payment options instead of fixating on saving a full 20% down.
Explore Down Payment Assistance Programs
Every state and hundreds of cities and counties have some form of down payment assistance program. These provide grants, loans, tax credits, or other benefits to help first-time buyers cover down payments and closing costs. Reach out to local government housing agencies to find programs you may qualify for based on location, income level, military service, disability status, or other criteria.
Negotiate Seller Contributions
In competitive markets, it's common for sellers to pay 1-3% of the purchase price towards the buyer's closing costs. This helps significantly reduce the cash needed at closing. You can negotiate this in your offer by requesting a specific seller credit amount. In hot markets, limited seller credits may be better than losing the home.
Buy Below Your Pre-Approval Limit
Just because a lender pre-approves you for a certain loan amount doesn't mean you have to spend that much. Consider looking at homes 15-20% below your max pre-approval limit. This allows you to make a larger down payment and keep monthly costs lower.
Get Gift Funds from Family
As mentioned earlier, receiving gift funds for a down payment from relatives is perfectly legal with no limit. Every bit given by family helps cut down the cash you need to bring to closing. If possible, politely ask close family to contribute.
Shop Around with Lenders
Work with both online lenders and local lenders to compare mortgage rates and fees. Even small differences in costs can affect how much cash you need upfront. Online lenders sometimes have lower costs thanks to less overhead.
Lower Other Monthly Debt Obligations
Lenders look closely at your debt-to-income ratio. Pay off car loans, student loans, personal loans, and credit cards to maximize your DTI. This allows you to qualify for a higher loan amount relative to your income.
Choose a Starter Home With Potential
Your first home doesn't have to be a forever home. Consider a more modest fixer-upper property or smaller condo that still meets your needs but has room to improve over time. This both lowers the purchase price and mortgage required.
Save Religiously
Cut all discretionary spending to ramp up savings in the months leading up to buying a home. Every extra bit of cash helps build your down payment funds. Look at it as a short-term trade-off that sets you up for the long run.
Rent Out a Room
Some first-time buyers have renters sign leases to occupy extra bedrooms, basement units, or in-law suites. This rental income pays part of the mortgage and supplements your savings. Just know being an amateur landlord comes with responsibility too.
Weigh Alternatives Like Renting
Sometimes the best financial move is to rent for another year or two and save aggressively for a larger down payment. Make sure you can truly afford to buy based on your overall budget and savings timeline. Don't rush in prematurely.
While buying a house with minimal funds takes effort and discipline, it brings life-long stability, pride, and wealth as you gain equity and build memories. Implement as many of these tips as possible to purchase smartly.
Summary: This comprehensive guide covers everything first-time homebuyers need to know about saving for a down payment. It explains what a down payment is, how much you need for different types of loans, where to source the funds, and when you actually pay it. The article provides tips for saving faster, common down payment mistakes to avoid, a checklist for first-timers, and alternatives if you can't save enough yet. There is also helpful information on buying a house with little money through low down payment programs, family gifts, negotiating with sellers, shopping lenders, and more.
