Buying your first home can be a heavy financial challenge. To qualify for a mortgage loan, you usually need to put down some cash even if you plan to finance the majority of the purchase. This down payment can amount to tens of thousands of dollars, especially in higher-cost-of-living areas.

Repeat buyers may be able to use the proceeds of the sale of a previous residence, including potential equity gains, toward their down payment. But first-time homebuyers don’t have that advantage, and sometimes must decide between paying the minimum down payment to qualify for their loan and making a larger down payment that could reduce their loan costs in the long term. If you’re in this situation, here’s what to consider as you plan for your down payment.

Average Home Down Payments

The median home down payment in 2021 was 12% of the home’s purchase price, according to the National Association of Realtors (NAR).1 Repeat buyers, who had previously owned another property, tended to have higher down payments (17% of the purchase price), and first-time homebuyers tended to put down 7%.2

“The biggest struggle for many homebuyers is saving up for the down payment,” said Melissa Cohn, regional vice president at William Raveis Mortgage. “First-time homebuyers will generally want to enter the marketplace as soon as they can, based on the funds they currently have.”

The two main sources of funds available to first-time homebuyers are their own savings and gifts from family, according to the NAR. Down payments for 58% of homebuyers in 2021 were based on savings. Other significant sources of down payment funds include:3

• Gifts from family members or friends
• Loans from family or friends
• Inheritances
• Borrowing from retirement funds
• Tax refunds

While only 11% of all buyers in 2021 cited saving up for the down payment as the most difficult part of the homebuying process, that was the case for 25% of buyers ages 22 to 30. For these younger buyers—who are, on average, more likely to be first-time homebuyers—coming up with a down payment was a major challenge.4

Loan Options for Different Down Payments

Some government-backed loan programs, including USDA loans and VA loans, offer no-down-payment options, although you can still choose to pay a down payment.56

For conventional loans, the lowest available down payment amount is usually 3%, but not everyone will qualify for a loan with a down payment that low. FHA loans, offered through another government-backed program, require a 3.5% down payment.7

For jumbo loans, which are too large to qualify for conventional conforming financing, down payment amounts vary from lender to lender but are often much higher, requiring borrowers to put down 20% or 25%.8

What If You Don’t Have 20%?

While many lenders and financial professionals will point to the financial advantages of making a 20% down payment, it isn’t always possible. Choosing to put down less than 20% will mean you’re required to pay for private mortgage insurance (PMI). PMI protects lenders from the possibility of you defaulting on the loan, and it’s one way loans can be more expensive overall with a lower down payment.

Some kinds of loans automatically must have PMI, including FHA loans. But if you believe your home has grown in value during the early years of your loan, you may be able to refinance your loan into another type of loan and no longer pay PMI if your loan-to-value ratio is 80% or lower.

How To Save for Your First Down Payment

As with any savings strategy, saving for a down payment usually involves finding ways to reduce expenses or increase income. The best place to start is by evaluating where your money is coming from and how you’re spending it, then deciding expense by expense what is necessary and what you could potentially live without or replace with a less expensive alternative.

Here are some wise ways to save for your first down payment to help you see your progress over time:

• Create a separate savings account or money market account where you can transfer your down payment savings and get an emotional boost from seeing them grow.
• Set your savings goal with closing costs in mind. Closing costs such as loan origination fees and title insurance often make up 2%-4% of the total cost of the loan, and can be even more.9 While you start saving, talk to the lenders you’re considering to get an idea of how much more to save for closing costs, and find out whether you can roll the closing costs into the loan itself, reducing the amount of cash you’ll need to save up ahead of time.
• Consider down payment assistance programs available in your state, which provide some portion of the down payment to qualified borrowers as either a no-interest loan or a loan that is forgiven after a number of years of occupancy.

If you apply for down payment assistance, be mindful that it can affect the time it takes to close the loan, which can be an important factor when the market is moving quickly. “Some states have more of these programs available than others, and there are limits like the size of the mortgage and the income of the borrowers,” said Cohn. “They often require some paperwork and a homeowners counseling class as well, so they do take time and effort.”

The Bottom Line

It makes sense that first-time homebuyers often don’t have as much of a financial nest egg as people who have previously bought a property. In some cases, first-time buyers may need to choose between taking longer to save up a larger down payment or buying a home sooner with a smaller down payment.

While making a larger down payment usually reduces the total costs of a home loan, some borrowers will find it’s worth getting a slightly more expensive loan and purchasing a home with their current savings. Making a good choice usually involves making a plan for saving, seeing what kinds of loans or down payment assistance you qualify for, and beginning to shop for a home. It’s important to keep interest rates and other loan costs in mind throughout the process.

Frequently Asked Questions (FAQs)

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