Mortgages

First-time homebuyer down payment strategies, programs

By
Social Links for Choncé Maddox Rhea ,
reviewed by
Mike Schmidt,
edited by
Social Links for Andrew Pentis
Updated June 26, 2023, 8:12 p.m. ET
A young woman smiles inside her new home.
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Buying a home is one of the biggest purchases you’ll ever make. It’s important to prepare your finances for homeownership, which includes deciding on some first-time homebuyer down payment strategies. For many would-be homebuyers, however, coming up with a down payment is the biggest entry barrier. 

A longtime standard rule of thumb is to put at least 20% down. Fortunately, although lenders typically like to see a 20% down payment, it’s not required. Some loan programs allow buyers to put less money down, and down payment assistance programs can help by providing additional funds. 

How much down payment should you put on your first house?

Your down payment amount will affect the type of mortgage loan you qualify for and your monthly payment. 

One of the first-time homebuyer down payment strategies is to put 20% down if you’re looking to reduce your monthly payments and avoid paying private mortgage insurance (PMI). You’ll need to buy PMI if you don’t put at least 20% down, with premiums often rolled into your monthly mortgage payment.

The average down payment in 2023 is 13%, however, some situations exist where a borrower can put down as little as 3% or even 0% on their home. Just know that lower down payment home loans may come at an additional cost, meaning you might pay a higher interest rate or other fee requirements as part of your terms.

Should I wait until I have a 20% down payment to buy a home?

You don’t have to wait until you have a 20% down payment to buy a home, but consider calculating your costs once you have an idea of how much you want to put down. 

This means factoring in the PMI premium you’ll need to pay and also considering the type of home you want to buy. With a lower down payment, you may want to consider a less expensive home to ensure you won’t be stretched financially. 

Also, keep in mind there are other ways to boost your down payment amount by using one of the down payment assistance programs. If you qualify, the programs either loan or grant you money that you can add to your down payment. 

Who qualifies for down payment assistance?

Down payment assistance programs require you to meet certain criteria. Some programs are offered through your mortgage lender, while others send money directly through subsidized loans. 

Before you apply, you’ll want to check to see that you qualify. While each down payment assistance program is different, most have similar criteria requiring that you:

  • Be a first-time homebuyer. Most down payment assistance options are available for first-time homebuyers. But you may find some options that are also available to applicants who haven’t owned a home in three years or are newly divorced and buying a home as a single parent.
  • Earn a low-to-moderate income. Certain income limits exist for single and married borrowers, and this varies depending on the program. Look for down payment assistance programs that accept your income level.
  • Buy a primary residence. Most programs require that you live in the home as your primary residence, meaning you can’t receive down payment assistance to buy a rental property or vacation home.
  • Buy a home within local purchase price limits. Programs also typically require that the price of your home doesn’t exceed a certain amount. This number is based on factors like the average home price and cost of living in your area.
  • Work with an approved mortgage lender. Several lenders work with down payment assistance programs and can help you determine eligibility and receive funds for your home.
  • Complete a homebuyer education program. Some programs require you to attend an in-person or online class about homeownership to be eligible to receive down payment assistance.

Low down payment mortgage programs

Various programs let potential homebuyers (as part of their first-time homebuyer down payment strategy) put less than 20% down. Here are some of the most common mortgage programs to consider if you’re looking to make a smaller down payment. 

Conventional loans

Conventional loans are not part of any specific government program. Here are the two types:

  • Conforming loans: Conforming conventional loans have maximum loan amounts that are set by government agencies, such as Freddie Mac and Fannie Mae.
  • Nonconforming loans: Nonconforming conventional loans have more lenient standards with eligibility and features varying by lender.  

Conforming loans allow you to borrow up to  $726,200 for your home or $1,089,300 if you reside in a high-cost county. If you need to borrow more for your home, you can use a conventional jumbo loan.

For a conventional conforming loan, you can put as little as 3% down and use a down payment assistance program. 

FHA loans

FHA loans are backed and regulated by the Federal Housing Administration. These loans have lower credit score requirements than conventional loans and allow you to put as little as 3.5% down. 

Maximum borrowing limits for FHA loans vary by county. FHA loans are usually a better option for someone with a lower credit score or smaller down payment. If you can afford to put more down on your home, you may save more on your mortgage with a conventional loan. 

USDA loans

USDA loans are backed by the U.S. Department of Agriculture. These loans are geared toward borrowers with low-to-moderate incomes looking to buy a home in a rural area. 

To qualify for a USDA loan, you must meet the income guidelines and choose a home located in an eligible rural area. This loan program offers a 0% down payment so you can finance 100% of the purchase price of your home. Homebuyers do pay ongoing mortgage insurance premiums during the life of the loan.

VA loans

VA loans are backed by the Department of Veterans’ Affairs. Private lenders issue VA loans to homebuyers who are either eligible veterans, current service members, or surviving spouses. 

VA loans don’t require a down payment and also provide additional protections if you ever have trouble paying your mortgage in the future. Another benefit of this loan option is that you don’t have to pay any PMI.

Down payment assistance programs: state and local

Different state and local down payment assistance programs are available to potential homebuyers. These programs provide funds in different ways, including grants, zero-interest loans, and forgivable loans. 

While each state and its counties have different variations of down payment assistance programs, here’s an overview of the common program categories you can expect. 

Grants

Grants are gift funds that you don’t need to pay back. Grants also don’t incur any interest or a lien on the purchased property. You can also use a grant to help cover closing costs for the home. This is one of the best options for down payment assistance and both state and local programs may offer grants under certain conditions.

Zero-interest, forgivable loans

A zero-interest, forgivable loan also known as second mortgage down payment assistance, is one of the next best options. With it, the funds you receive are forgivable over time as long as you meet certain terms. 

For example, the terms may be to not sell or refinance your home during the first five or six years. If you fail to meet the terms, then part of all of the down payment assistance funds must be paid back. 

Zero-interest, deferred-payment loans

Certain down payment assistance programs offer zero- or low-interest loans at a fixed rate. This money can also be used for closing costs. The payments often aren’t due until you sell or refinance your home. Unlike the forgivable loan option, you may have to repay the down payment funds if you sell or refinance your home at any time during your loan term. 

Low-interest loans

Low-interest loans allow you to borrow the money you need for a down payment or closing costs. These loans typically have competitive terms and a longer repayment term compared to your average loan, which helps reduce your up-front costs. 

How to find down payment assistance programs

Down payment assistance programs vary across each state and city. It’s important to work with lenders or even a local housing counselor to learn more about which programs are available in your area and if you’re eligible.

Here are a few places to start.

Your state housing finance authority

Each state has a housing finance authority in place to help residents find affordable housing options and learn more about assistance programs. Just search online for your state’s housing authority website, or you can find it by visiting the National Council of State Housing Agencies website.

Your city and county governments

Your city and county government websites could also provide excellent resources for potential homebuyers in search of down payment assistance programs. Some down payment programs are only available to residents of specific counties, so a city housing authority office can help you determine what you’re eligible for.

The U.S. Department of Housing and Urban Development

The Department of Housing and Urban Development (HUD) provides federal housing information as well as links to state resources for homeownership programs and down payment assistance.

HUD-approved housing counselors

The HUD also provides a nationwide network of house counseling agencies that have been helping American homebuyers for more than 50 years.

Just enter your zip code or state on HUD’s website to find a housing counseling agency near you.

Down Payment Resource

Down Payment Resource is a company that uses technology and connections to help potential homebuyers find the down payment assistance programs they qualify for. You can browse their website to find more resources and even inquire about programs in your area.

Mortgage down payment gifts and loans

Another way to find down payment money is through gifts and loans from your family. Lenders accept gift money from your family member as long as they’ve submitted a gift letter stating how much they provided along with their bank account information and relationship to you. 

Friends and family can also loan you money for your down payment,  but you must get the loan terms in writing to show your lender. Usually, mortgage gift donations limit how much gift money can be used for a down payment, and this can vary depending on the lender or loan type.

The IRS annual exclusion for gifts is $17,000 for 2023. This means your family donors can give up to this amount without you, the recipient, having to report it on your taxes. 

Crowdfunding a mortgage down payment

Crowdfunding allows you to gather donations or gifts from various places. There are a few crowdfunding sites that make it easier to share your reason for needing the money and get people to donate securely online. 

HomeFundIt is a crowdfunding platform that helps you collect down payment gifts from family and friends and even match down payment gifts to fund up to $2,000 of your closing costs. Feather the Nest is a similar crowdfunding platform for potential homebuyers.

Crowdfunding may not provide the entire amount you need, but it could be an efficient first-time homebuyer down payment strategy to collect gifts. For example, if you’re getting married and would rather request money for your dream home purchase instead of household gifts, you can ask friends and family to donate to you through your crowdfunding site. 

Retirement account withdrawals or loans

Tapping into your retirement savings is another way to gather more money for a down payment. You can borrow money from both your 401(k) and Roth IRA accounts to assist with buying a home. 

  • Employer-sponsored 401(k) plans: When you take out a 401(k) loan, you don’t have to pay a withdrawal penalty or income tax on the amount so long as you repay the loan with interest. You can borrow up to half of your vested account balance up to a maximum of $50,000.
  • Traditional IRA withdrawals: Typically, if you withdraw distributions from your IRA, you’ll pay a 10% income tax if you’re under the age of 59 ½. There’s an exception to this fee for some purposes, including buying your home. Qualified first-time homebuyers can withdraw up to $10,000 from their traditional IRA — with no penalties — to use for a home purchase.
  • Roth IRA withdrawals: With your Roth IRA, you can withdraw your contributions at any time with no fees or penalties, since the money has already been taxed. However, you must have had the account open for at least five years.