Tradition holds that first-time homebuyers make a down payment of 20% of the purchase price. While there are good financial incentives to putting down 20%, such as avoiding private mortgage insurance, most home loans and mortgage lenders have long allowed down payments as low as 3% or 5%.
But with rising home prices, saving up even for the average first-time homebuyer down payment of 7% can be difficult. That down payment on a home priced at $467,700 — the median sales price for homes sold in the fourth quarter of 2022 — would come to $32,739, not including closing costs and other fees.
Luckily, there are resources and programs to help buyers afford a down payment, from family gifts and withdrawals from retirement savings to second mortgages and direct first-time homebuyer down payment assistance programs.
Learn more about resources that help homebuyers afford a down payment on a home:
- How Much Money Do You Need for a Down Payment?
- Using Financial Gifts for a Down Payment
- Using Retirement Funds for a Down Payment
- Borrowing Money for a Down Payment
- Down Payment Assistance Programs
- Who Qualifies For DPA Programs?
- How To Find Down Payment Assistance Programs
- Down Payment Assistance FAQ
- The Bottom Line on Down Payment Assistance Resources
How Much Money Do You Need for a Down Payment?
When it comes to deciding how much down payment you need to buy a home, expect to hear a lot of advice. Some people will tell you to save 10% of the asking price, several might say it’s better to have 20%, while others will suggest saving as much as you can.
A 20% down payment has several advantages. In addition to letting you avoid PMI, it will save you money in the long run, boost your overall home equity, and show real estate agents and sellers that you’re prepared to buy a home.
While a 20% down payment once was required to get a mortgage, few types of mortgages or lenders have required it for many years. Loans backed by the Federal Housing Administration allow a down payment as low as 3.5% of the purchase price, and conventional loans can have down payments as low as 3%. Veterans Affairs offers loans with no minimum down payment to qualified service members, veterans, and their spouses, though the private lenders that issue the loans may have their own limits.
Here’s what common mortgage types require for a down payment:
Minimum Down Payments for Common Types of Mortgages
|Loan Type||Minimum Down Payment||Minimum Credit Score|
|Conforming conventional loan||3% (or 20% to avoid private mortgage insurance).||620|
|Nonconforming conventional loan||Varies, but usually about 10% (or 20% to avoid private mortgage insurance).||680, though it mostly depends on the lender.|
|FHA loan||3.5% with credit scores of 580 or higher; 10% for credit scores of 500-579.||500|
|Department of Agriculture (USDA) loan||0%||640|
|VA loan||Not required by the VA, though lenders may set their own minimums.||Not required by the VA, though lenders may set their own minimums.|
Using Financial Gifts for a Down Payment
One way that first-time homebuyers can get help with a down payment is from family and friends who are willing to contribute money.
However, there are rules and guidelines that must be followed to use gift money for your down payment:
- A financial gift can come only from a family member or an extremely close friend. So don’t think you can turn to GoFundMe or collect money from random people on the street to help bolster your down payment.
- Government funds such as down payment assistance grants may qualify as a financial gift, though it’s important to know which grants are eligible. To that end, you should speak to your lender and the grant provider to make sure you can legally use any grant money you qualify for in this way.
- How much money one person can provide another as a gift without paying taxes is limited. According to the IRS, the gift tax takes effect on individual gifts of $17,000 or more, and is paid by the giver. So, if your parents give you $17,000 for a down payment, and your sibling gives you the same amount, they won’t pay taxes on either.
- You’ll need a gift letter. For a cash gift to count as a gift, it must be given without any expectation that it will be repaid. A gift letter should include the dollar amount, the donor’s name and their relationship to the recipient, when the money was gifted, a statement that no repayment is expected, the donor’s signature, and the address of the home being purchased. Without a letter, the gifted money will be considered a loan.
Additionally, many lenders limit gift funds to a certain percentage of the total cost of the home. Be sure to check all lender requirements and guidelines prior to using gift money for a down payment.
Using Retirement Funds for a Down Payment
If you’ve been saving for retirement, you might consider tapping into that money for a down payment. There are two ways you can get funds out of your retirement savings.
“You can either make a withdrawal where taxes would be withheld, or you can borrow up to 50% of the value of your retirement savings,” says Bill Flagg, a licensed broker and Realtor at ERA Queen City Realty in Scotch Plains, New Jersey. “You would need to contact your plan administrator to find out exact amounts, also you will be required to provide terms and conditions of the retirement account.”
If you borrow against a retirement account like a 401(k), you’re effectively taking out a loan against yourself, meaning you’ll have to pay that money back. This may be a good way to use that source of funding, since you can borrow up to 50% of the vested account balance up to $50,000, and your lender may not include it when calculating your debt-to-income ratio. You have to repay such loans within five years. If you leave your employer, you may need to pay the loan off in full or have the amount count as a withdrawal, which may incur tax penalties.
Alternatively, you can withdraw up to $10,000 from a traditional, SIMPLE, or Roth individual retirement account without penalty. If you’re under 59 1/2 years old, you’ll have to pay a 10% tax penalty on any early withdrawals, though the penalty can be waived if the money is used to buy a first home. If you have a Roth IRA, you should contact a tax professional or financial advisor, since those accounts work differently than other retirement funds.
Borrowing Money for a Down Payment
One solution to making a down payment is to borrow it. But taking out a personal loan to cover your down payment may be difficult, since doing so will increase your debt load and could affect your ability to get a mortgage.
There’s an additional question to answer about whether buyers are allowed to use a personal loan as a down payment. Conventional loans and FHA loans prohibit using personal loans for a down payment, and most lenders won’t allow it. So make sure to check with all relevant parties before trying to use a personal loan in this manner.
Another option for making a down payment and also for paying closing costs is getting a second mortgage. Also known as a piggyback mortgage, this method involves taking out a second mortgage from another lender to cover part of the purchase.
One of the benefits is it can help you avoid PMI. A common scenario is the buyer makes a 10% down payment on a home, gets a primary mortgage for 80% of the price, and adds a second mortgage to cover the final 10%. By keeping your primary loan less than 80% of the purchase price, you avoid PMI. This also can ensure your primary loan is under the conforming loan limit and you avoid the need for a jumbo loan.
It’s important to note that the second mortgage will usually come with a higher adjustable interest rate. You’ll also need to qualify for both loans separately and pay closing costs on your second mortgage.
Down Payment Assistance Programs
Down payment assistance programs help buyers cover at least a portion of the initial costs associated with buying a home. Most programs are funded by the Department of Housing and Urban Development, and are typically run at the state or local level.
“There are many federal, state, and local programs available to help with down payment towards purchasing a home,” said Valerie Saunders, a licensed mortgage broker based in Jacksonville, Florida, and president-elect of the National Association of Mortgage Brokers. “They are generally income-based and may have additional requirements based on the type.”
Each program has its own set of criteria, so it’s important to search for programs you might qualify for. Local brokers, lenders, real estate agents, or government officials also may be helpful in guiding you to a suitable program.
“When looking for down payment assistance program options in your area, it is best to research local or state housing agencies which can provide information about specific down payment grant programs or other financing incentives,” says Scott Berens, CEO of the Agoura Hills, California-based Balsamo Homes.
One of the main ways that down payment assistance programs help first-time homebuyers is by offering cash grants for down payments. These grants can be provided by state or local governments, or by employers, credit unions, private banks, and other financial institutions. Regardless of where you get them, these grants typically do not require repayment as long as you meet their stipulations, like living in the home for a certain number of years. They typically cover 2% to 5% of the home’s cost, depending on the mortgage type.
Closing cost credits
Some programs help with closing costs in the form of credits. Closing costs can be expensive, running generally between 2% and 5% of the purchase price. Lenders often offer help to borrowers with paying closing costs in addition to the down payment, though in some cases, you either get help with one or the other. Such credits sometimes come with a higher interest rate to compensate the lender, which may cost you more money over the life of the loan than paying closing costs yourself.
Generally, these are low- or no-interest second mortgages that could be forgivable if you meet certain guidelines, such as owning and living in the home for a certain number of years. They often come with 0% interest and only have to be repaid if you move out, sell, or refinance before your loan term ends.
Just like the previous type of loan, these are low- to no-interest loans with a fixed rate. They usually require no payments unless you move, sell, or refinance your primary mortgage.
These loans require regular payments, but the low interest rate keeps costs minimal and spreads them out over time.
Who Qualifies For DPA Programs?
Most down payment assistance programs are for first-time homebuyers. Qualifications vary by state and municipality. Typically, you want a credit score above 620 with a reasonable debt-to-income ratio, and applicants often must take a class on finances and buying a home. Also expect an income limit if the program is for low-income borrowers.
Additionally, some specific regions or people in particular occupations — such as teachers, law enforcement, and public servants — can get special consideration from programs such as HUD’s Good Neighbor Next Door.
How To Find Down Payment Assistance Programs
You usually can find a down payment assistance program by either reaching out to your state or municipality’s housing agency, seeking the assistance of a mortgage broker or real estate agent, or visiting the FHA or HUD websites.
Below is a list of down payment assistance programs from each state. This list does not reflect the entire scope of DPA programs available in each state.
Down Payment Assistance Programs by State
Down Payment Assistance FAQ
Here are the answers to some frequently asked questions about down payment assistance programs.
Your lender and the DPA agency you’re working with will both take part in the application process. Since every DPA program is different, the time it takes to get approved will vary considerably, though it should be somewhere in the range of 30 to 45 days.
Prepare income statements, tax documents, identification, and any other relevant documentation proving your trustworthiness as a borrower. As for your financial readiness, you’ll need a credit score in the mid-600s and, in many cases, your income must not exceed a certain threshold.
The process to apply for down payment assistance varies by program. It’s a good idea to reach out to a real estate professional, mortgage broker, or lending representative to learn how you can apply. HUD also provides resources to learn how to apply for DPA programs.
The Bottom Line on Down Payment Assistance Resources
While affording a home may seem daunting at first, there are resources that can help make your dream of owning a home a reality. In addition to personal and family resources, every state has first-time homebuyer down payment assistance programs to help borrowers make a down payment and get into their own home.
- National Association of Realtors (2022)