Hurdles to Homeownership: The Down Payment

When buying a home, perhaps the most common obstacle to getting those keys is the down payment. While the money to purchase the home comes in the form of the loan you pay back to the lender over the years, the down payment is a percentage of the purchase price that you provide upfront.

Sadly, finding those funds holds many potential buyers back from getting that dream home. According to a National Association of REALTORS® (NAR) Research Group survey, in 2019, 13% of all buyers cited that saving for a down payment was the most difficult task in the home buying process. Additionally, 26% of first-time buyers and 7% of repeat buyers reported the down payment was a difficult hurdle to surpass.

Let’s take a closer look at this seemingly formidable sum you need to provide, and tips for how to make it more achievable—or not to pay it out-of-pocket at all!

Why Is the Down Payment So Scary?

If you’re struggling to come up with the down payment, take heart: you are not alone. According to the same NAR survey, since 2015, student loans (for Millennials especially) have been the most cited expense that delayed saving for a down payment, followed by credit card debt, and car loans. Other difficulties reported include limited income, rising rents, and health and medical costs.

Additionally, many consumers (some 35%) believe that a 20% down payment is required for any home loan. But while that 20% is certainly a great way to start, and also saves you from paying private mortgage insurance (PMI), you simply don’t need that much saved to find your home.

The Good News About Down Payments

The actual minimum down payment typically required for conventional loans is 5%. And certain conventional loan programs like Fannie Mae’s HomeReady® and Freddie Mac’s Home Possible® require as little as 3% down payment if you meet certain income requirements and take their homeownership education courses.

FHA loans, very common among first-time homebuyers, only call for a 3.5% down payment with a minimum credit score of 580 (as of September 2021). And VA and USDA loans are 100% government-financed, so they don’t require a down payment at all!

Getting Help with Your Down Payment

There are other paths to achieving that down payment beyond your savings. Down payment assistance programs (also known as “secondary financing” or “secondary mortgage”) can be grants, tax credits, low-, or no-interest loans. These are typically reserved for “first-time” homebuyers (in this case, “first-time homebuyer” actually just means you have not owned a home in the last three years). Even better, these assistance funds can often be applied to your closing costs, too. Usually, these programs are run by organizations like your local or state housing authority or a nonprofit. Employer assistance programs are another option for second mortgage loans. 

Using gift funds from a relative or other source (depending on the loan program’s rules) is also a method for making your down payment. In 2019, 16% of all buyers received a gift or loan from a relative or friend toward their down payment, while 32% of first-time buyers and 8% of repeat buyers received gift help. Gift funds do require a little work on the part of the donor, like a gift letter stating the money is not a loan and a copy of the check or their bank statement. Ask your lender for help meeting the guidelines.

So you see, there is actually a lot of good news about and resources for down payments out there. The more informed you are, the better prepared you will be to cross this hurdle and get that dream home!