There comes a point for many prospective first-time homebuyers when nearly everything you do is focused on saving for that purchase. Even when you’ve been putting money away regularly for years, you find yourself willing to cut out that beach vacation you had been planning, eating in more and even take on a part-time job to help close the gap between you and homeownership.
But even though you've carefully considered what you can afford and will qualify for in terms of monthly mortgage payments, the down payment remains a hurdle you, like most first-time buyers, struggle with.
How Much Do You Need for a Down Payment on a House?
As housing inventories remain low in major markets throughout the U.S. and home prices continue to rise, the difficulty of saving for a down payment grows. The standard down payment for a conventional loan is 20% of the home's purchase price. Lower mortgage down payments are available, however, in programs that may include a higher interest rate or require private mortgage insurance.
[Read: The Guide to Closing Costs]
On a national scale, it takes 14 years for a median-income household to save enough for a 20% down payment on a median-priced property, according to homeownership investment company Unison in its 2019 Home Affordability Report. For first-time homebuyers trying to save for a down payment, the prospect of having to sacrifice more or lower their expectations can be disheartening.
“Without any changes to the market or some special things happening to the homebuyer, sacrifices are necessary in order to actually make it a reality,” says Judd Schoenholtz, co-founder and CEO of online real estate brokerage Open Listings, which represents buyers in transactions on the West Coast.
In real estate information company Zillow's Consumer Housing Trends Report for 2019, 34% of homebuyers who financed their purchase used gifts or loans from friends and family to help afford their down payment.
Low Down Payment Options: 0% and 3% Programs
There is some respite for first-time homebuyers when it comes to borrowing options, with the growth of low down payment mortgage programs. Mortgage options requiring less than 20% down include loans through the Department of Veterans Affairs, the Federal Housing Administration, the Department of Agriculture or the purchase of private mortgage insurance. Some of these programs allow homebuyers to get financing with as little as 3% (or even 0%) down.
These options are "key products for first-time homebuyers," says Tian Liu, chief economist for Genworth Mortgage Insurance. Genworth recently released its second-quarter 2019 report, which notes 559,000 first-time buyers purchased single-family homes between April and June. Of those purchases, 424,000 were financed with low down payment mortgages.
The growth in low down payment programs is a turnaround from the recession, when lenders wouldn’t move on many deals without perfect credit and 20% down. But today, first-time homebuyers are often the ones to hold off on making a deal based on financial uncertainty. When mortgage interest rates hit 5% at the end of 2018, many homebuyers considered it a breaking point for affordability and stopped shopping.
Homeowners should not fret, as long as they're prepared for the possibility of a downturn.
Lenders have since lowered their interest rates, and Liu says rates are still falling to around 3.6% or 3.7% for the third quarter of 2019, compared to 4% in the second quarter. But first-time homebuyer activity hasn't fully recovered. Even more so than down payments, Liu says: "That tells us that affordability is really the pain point for many first-time homebuyers."
What Do You Need to Buy a House?
With a 3% down payment for a $300,000 house or condo, you’ll need just $9,000 in cash instead of the $60,000 in a standard 20% down payment. The mortgage insurance required with most types of low down payment programs increase your monthly payment, but you can have less savings and still reach your goal.
However, a smart homebuyer will save even more. The last thing you want is to move into a house with no money in the bank only to sustain roof damage in a storm three weeks later.
If you're buying a house, don't make these mistakes that could derail a sale or leave you with a lemon.
How to Save for a House
What are your saving options? For the most part, they’re the same as saving for any other reason: taking a bag lunch to the office instead of eating out every day, cutting cable or online subscriptions and canceling a gym membership.
According to the National Association of Realtors' 2019 Home Buyers and Sellers Generational Trends Report published in April, 54% of buyers age 28 or younger made sacrifices to afford a home, as did 50% of buyers between 29 and 38. The most common methods for saving were to cut spending on luxury or nonessential items, entertainment and clothes, as well as making minimum allowable bill payments. For those under 28, 10% reported they earned more to help save by getting a second job.
As you save for the home you want, keep in mind that not everyone qualifies for the same mortgage program. It would be upsetting to save for a 3% down payment, only to find out you don’t qualify for a 3% down payment program when you’re ready to start shopping. Speaking with a financial advisor or housing counselor can help you determine the best options for you while you're still saving. The U.S. Department of Housing and Urban Development has a list of approved housing counseling agencies that offer free services to residents.
For that reason, it’s important to keep an open mind about the type of house you’d like to buy. Consider adjacent neighborhoods, fixer-uppers or fewer bedrooms to find a more affordable home. Offsetting the cost of owning a home after you purchase is where Schoenholtz says “the creativity steps in.” Rather than buying a single-family home, he sees younger buyers looking for a property with an apartment that can be rented out or a garage studio where a business can operate.
Liu stresses that the first home you purchase is often a stepping stone to building equity and wealth, from which you can purchase future homes that better suit your needs and desires. "There's this romantic notion that this is going to be your forever home ... and that's really not the case," he says. "Start with something affordable and build from there."
Are these must-haves on your list?
One of the first steps you take when deciding you want a new home is determining what you need in order to be happy there. The list of your must-haves can get long, and you reasonably can’t expect to find a house that perfectly matches all your criteria. “Someone has a list of 10 things – if they can find a house that has seven or eight of those, they’re doing pretty good,” says Jeff Plotkin, a Texas-licensed Realtor, attorney, certified public accountant and vice president of Habitat Hunters Inc. in Austin, Texas. Deciding what needs win out in your next home search can be tough, but there are a few key features and amenities many buyers seem unwilling to live without.Right in your price range
Right in your price range
Being able to afford your new home is a given, but buyers are often faced with having to choose between stretching their budget to have the master suite they want or having more reasonable monthly mortgage payments. Price often wins out in the end – you’re less likely to enjoy that master suite if you’re eating soup and foregoing vacations for the next five to 10 years to pay it off. In the 2018 National Association of Realtors Home Buyer and Seller Generational Trends report, home affordability was one of the three most important factors for respondents who recently purchased a home – behind only quality of the neighborhood and a location's convenience to work.In your preferred location
In your preferred location
Homebuyers care a lot about being able to get from point A to point B – as well as points C, D and E. Your future neighborhood can dictate what school your kids go to, how long it takes to get to work and how easy it is to stop at the grocery store when you forgot an ingredient for dinner. Plotkin says buyers put a lot of stress on where the house is, rather than what’s in the house itself. They’re looking for “proximity to schools, shopping, entertainment, public transportation,” he says.Interior over curb appeal
Interior over curb appeal
A handsome exterior keeps potential buyers from quickly driving away, but insight from new construction marketing site HomLuv.com reveals that it’s the interior that most often serves as the deal-maker. HomLuv’s website allows homebuyers to begin their search for a new home from the room they care about most, whether that’s the kitchen, living room or master bathroom. The one part of the house people don’t seem too worried about? Outside. In the roughly two months since HomLuv launched, “no one has chosen to look at exteriors first,” says Mark Law, vice president of product management for BDX, a home builder marketing company and parent company of HomLuv.The right number of bedrooms
The right number of bedrooms
While the interior of the home allows more wiggle room to compromise on your needs, there are some details that buyers must have. The right number of bedrooms would be the big one. Family expansion is often a primary reason homeowners start looking for a new house, so leaving out that extra room would defeat the entire purpose of the sale. According to the NAR report, 85 percent of homes purchased by respondents in 2017 had three bedrooms or more.Window treatments for reference
Window treatments for reference
Staging matters in a home. As much as we think we can picture how a vacant house will look with our own furnishings and decor, at the end of the day we need some suggestions. Law says builders will include big picture windows in bedrooms or over the tub in a master bathroom to let in natural light, but if the photos show the space without curtains or blinds, house hunters will inevitably see a design flaw. “They’ll say, ‘I’m not an exhibitionist,’” he explains. To avoid turning homebuyers off, window treatments should be included in listing photos and for home tours.Move-in ready
The condition of the home you shop for often goes hand in hand with your budget and the neighborhood you hope to live in. If your budget is at the lower end of the price range in the hottest community in town, you’ll likely find yourself buying a house that needs a little love. If your budget doesn’t restrict it, chances are you’ll have your pick of properties that have been turned by real estate investors. “The [buyer] demand is for 100 percent move-in ready condition,” says Bobby Montagne, CEO of Walnut Street Finance, a private money lender focused on home flipping in markets in Virginia, North Carolina and the District of Columbia metro area.Possible to picture your vision
Possible to picture your vision
Even if you’re one of the detractors who prefers a fixer-upper, it’s still necessary to be able to envision how the space will look once you’ve added your personal touches. Based on reactions from HomLuv users, details as small as the cabinet color in a photo can change the way a person thinks about a house. Law says he’s found preferences differ from region to region – darker cabinets may see more love in the South, while in California the preference is for white kitchen cabinets. “You could offer a free puppy and free pots and pans with the house, but if the cabinets are dark they still don’t want it,” he says.Warranty available
For newly built homes and those that have been recently flipped with significant work, you want to know that the professionals involved stand by their work. New construction homes often come with a warranty from the builder or the option to get a third-party warranty, and you should ask the investors involved with a flip for the same level of protection. “A good builder [or] a good flipper does not have a problem with that,” Montagne says. If an issue arises within the life of the warranty related to the workmanship, you can rest easy knowing you’re covered financially for the repairs.Potential for value growth
Potential for value growth
Your home isn’t just where you’ll live – it’s also an investment. There are a few easy decisions you can make that reduce the chances of losing out on potential growth in value over time, whether that means buying in a neighborhood where home values are steadily growing, finding a home in a desirable school district or avoiding living next to a strip mall. “When you’re buying a house, you’re not only buying it for yourself, you’re buying it for resale,” Plotkin says. “So most people are not going to want to back up to commercial [property] or a busy road.”Read More
Updated on Oct. 9, 2019: This story was published at an earlier date and has been updated with new information.
She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.
Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at firstname.lastname@example.org.