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Down Payment Strategies for First-Time Home Buyers

Even if you don't have much savings, buying your first home is possible with low-down-payment loans and state and local down payment assistance programs.
March 26, 2019
Finding the Right Mortgage, Mortgages
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The down payment. It may be the only thing keeping you from a home of your own. You’ve got a good job, you’re paying off debt, and mortgage rates are still remarkably low. And rental rates are getting ridiculous.

The down payment is cash you pay upfront that’s applied to the home’s purchase price, decreasing the amount you borrow in a mortgage. A typical down payment is thousands of dollars. Find out how to overcome this homebuying barrier.

It doesn’t always take 20% down

The down payment hurdle may be lower than you think. Traditionally, lenders have preferred 20% down, but many low-down-payment options are available, especially to first-time buyers:

Making a small down payment can trigger extra expenses, though. Mortgage insurance, which protects lenders against loans that default, is required on all FHA loans and on conventional loans with down payments less than 20%. VA loans have a funding fee, which can be rolled into your monthly loan payment. And a lower down payment usually means you’ll pay a higher interest rate.

» MORE: How much down payment do you need to buy a home?

State and local down payment assistance

Here’s a little-known source of down payment help: state and local assistance programs.

There are programs in every state, implemented by government agencies, nonprofits, foundations and even employers. Down payment assistance is often combined with favorable interest rates and even tax breaks. Assistance can have a geographic focus as wide as the nation or as narrow as a city — all the way to hyper-local initiatives targeted as tightly as neighborhoods, and even house by house.

» MORE: Find first-time home buyer assistance programs in your state

Often, it’s a matter of matching a property to a program, based on a home’s location and price, says Rob Chrane, CEO of Atlanta-based DownPaymentResource.com. Assistance requirements typically set a maximum sale price for a county or other geographic definition. These programs aren’t meant to help borrowers buy million-dollar homes or vacation properties, he says, adding that some programs have income limits.

“There are some myths and misperceptions around this,” Chrane says. “Sometimes people think, ‘Oh, this is only for really low-cost housing, in targeted census tracts, distressed neighborhoods … and very low-income households. It’s much more widely available than that.”

» MORE: How much house can you afford?

Family down payment gifts and loans

Getting help from family members might be another way to go.

Garrett Clayton, CEO of AmCap Mortgage in Houston, cautions that receiving a gift toward a down payment takes a “full circle” of documentation to satisfy a mortgage lender’s requirements. The donors will have to verify in writing not only that they made the gift, but that they have the financial ability to make such a donation. That will require them to provide bank statements as proof, along with a letter confirming that the donation is a gift and not a loan.

The donors will have to verify in writing not only that they made the gift, but that they have the financial ability to make such a donation.

“From a lender perspective, if it is something that will be required to be paid back, then we would need to take those terms of repayment into the calculation of the borrower’s (debt-to-income) ratio, to make sure they still qualify,” Clayton says.

However, while properly documented gifts are acceptable to lenders, you might not want to rely exclusively on the kindness of family members, he adds.

“We see that borrowers that have none of their own money in the transaction are way more likely to default on loans,” Clayton says. “I would much rather do a loan to a 600 FICO client that has 100% of their own down payment, versus a 780 client that is getting 100% (of their down payment as a) gift.”

Tapping retirement accounts

If you have a retirement nest egg, you might be tempted to tap a portion of it to help with the down payment.

IRA withdrawals for home purchases are allowed, up to $10,000.

Employer-sponsored 401(k) plans often allow for penalty-free hardship withdrawals or loans. But if you’re under 59½, you’ll pay income taxes and a 10% penalty on the withdrawal. And loans can trigger an immediate repayment — or taxes and a penalty — if you lose your job.

IRA withdrawals for home purchases are allowed, up to $10,000. Roth withdrawals are tax-free and without penalty if you’ve had the account for at least five years. Tapping a traditional IRA will trigger income taxes.

» MORE: Should you use your Roth IRA to buy a home?

Crowdfunding a down payment

Crowdfunding is the ultimate dream for snagging sudden money from strangers, other than the lottery. It can be done, but there are some catches.

First, you’re not going to get this done on Kickstarter; personal fundraising isn’t allowed there. Sites like GoFundMe are best suited for hard-luck appeals like medical expenses for life-threatening diseases, so it’s unlikely you’ll get a lot of help there when you’re pitching to raise money for a mortgage down payment. But who knows?

FeatherTheNest.com might be an option to consider. It lets you build an online profile for a gift registry where contributions to your down payment can be funneled into a linked bank account. The service seems particularly suited for engaged couples and newlyweds. The transaction fees are pretty stout, though — totaling about 8% on each donation.

The most obvious strategy

There’s always the spend-less-than-you-earn-and-save-it strategy to building a down payment fund. Maybe a few savings tips can help you there.

More than likely, it may take a combination of strategies to get you into a home with a decent down payment — and still have a little left over to cover those unexpected homeownership expenses.

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