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Saving enough money for a down payment on a house can take a long time.
A renter making the U.S. median annual income of $60,336 might need eight years to save 20% for a down payment on a median-priced home of $225,300, according to apartment and home-search platform HotPads.
If you’re just starting to save, it can feel like you’ll never reach your goal. Can you take a shortcut and borrow the money that you need for a down payment?
You likely won’t find many options for a down payment loan — which is a personal loan that you use to make a down payment on a home. And those that do exist come with some drawbacks. You may have better luck looking for a mortgage that doesn’t require a 20% down payment.
Let’s look at some down payment options that could help you on the road to financing your dream home.
Why is a down payment important?
Saving for a down payment can be difficult, but putting money down on a home purchase is a good idea for multiple reasons.
- Lower monthly payments — The more money you put down, the less you’ll have to borrow to buy your home. A smaller loan amount usually means smaller monthly mortgage payments.
- Less interest — Reducing the amount you borrow may mean you’ll pay less interest over the life of your mortgage. For example, let’s say you’re purchasing a $200,000 home with a 4% interest rate. If you put 10% down, you’d pay $129,365 in interest over 30 years. By putting 20% down, you’d pay $114,991 in interest over 30 years — saving you more than $14,374 in interest.
- Avoiding private mortgage insurance — If you put down less than 20%, you’ll likely have to pay private mortgage insurance, or PMI, though a few types of home loans don’t require it. This extra insurance will increase your monthly payment amount.
- Instant equity — Equity is the difference between how much your home is currently worth and the amount you owe on it. If home values decline, you could end up owing more on your mortgage than your house is worth. Making a down payment can help create equity that may protect you from fluctuations in your home’s value.
How much do you need for a down payment?
You may have heard that you need a down payment equal to 20% of the total cost of the home you want to buy — but that’s not always the case. How much you actually need for a down payment depends on the type of loan you’re considering.
Let’s look at the different types of mortgage loans and their down payment requirements.
- Conventional loans — Depending on the mortgage lender, down payment requirements can be as small as 3%. But if you’re putting down less than 20%, most lenders will require you to pay PMI. Conventional loans are the most common, currently making up roughly two thirds of all mortgage loans.
- Federal Housing Administration loans — FHA loans are available to borrowers who are putting down as little as 3.5%, but they require mortgage insurance.
- Veterans Affairs loans — Current service members, eligible veterans and surviving spouses may be able to get a mortgage with a low, or even no, down payment without having to pay PMI. But borrowers may have to pay an upfront fee.
- U.S. Department of Agriculture loans — Zero down payment loans are available for eligible applicants, but you’ll need to pay mortgage insurance to the USDA.
Can I get a down payment loan?
The good news: You may not need to put down 20% in order to get a mortgage. The bad news is that not putting down that much on a conventional mortgage may mean a costlier loan, if you can get one. Or, if you qualify for a loan with a lower down payment requirement, you may still need to come up with thousands of dollars. For example, a 3% down payment on a $250,000 home is still $7,500.
If you’re coming up short with the funds for a down payment, you may be wondering if it’s possible to cover the cost of a down payment with a loan. Let’s take a look at some loan options you may be considering.
If you have less than 20% to put down on a home purchase, lenders typically require you to pay for mortgage insurance. But by “piggybacking” a home equity loan or home equity line of credit onto your main mortgage, and putting some money down, you may be able to avoid PMI.
Here’s how it works: You might put 10% down, borrow 80% with a traditional mortgage, and borrow the remaining 10% with a piggyback home equity loan.
The drawback here is the piggyback second loan often comes with a higher interest rate that may also be adjustable — meaning it could go even higher during the life of the loan.
What about getting a personal loan to cover your down payment? That’s not usually a doable (or advisable) option for a few reasons.
- It increases your debt-to-income ratio. When reviewing a mortgage application, lenders typically look at a borrower’s debt-to-income ratio, which is all of the debt payments you make each month divided by your gross monthly income. Taking out a personal loan for a home down payment means that loan will affect your DTI calculation — and could possibly raise your DTI to exceed the lender’s allowable limits.
- Fannie Mae doesn’t allow it. One of the government-sponsored companies that guarantees conventional loans won’t accept a personal loan as a funding source for down payments.
- It can make you look like a risky borrower. “Logically speaking, [a personal loan] defeats the purpose of a down payment,” says mortgage loan originator Michael Kaufman from R&J Capital, LLC. Lenders view a sizeable down payment as reducing their risk. Using a personal loan for a down payment might signal to a lender that the borrower isn’t a good risk for a loan.
Down payment assistance programs
If you’re a first-time or low-income homebuyer, you might qualify for help through a state or local homebuying program. Some of these programs may offer down payment loans for qualifying borrowers.
For example, the California Housing Finance Agency’s MyHome Assistance Program offers a loan of up to 3.5% of the purchase price or appraised value of the home, which can help some first-time homebuyers to make their down payment.
Help from friends or family members
You can use monetary gifts from friends or family members for your down payment, as long as you provide a signed statement to your lender that the money is a gift and not a loan. Check with your lender about specific documentation it will need and how much of your down payment can come from a gift.
Tips to save for a down payment
Ultimately, there are many advantages to saving for a down payment, rather than trying to borrow the funds you’ll need. Setting funds aside may take a little longer but could help you save on costs in the long run.
Here are some tips to help you save toward a down payment on a home.
- Know how much you need. You know you need a down payment, but how much is it actually going to be? It’s good to know exactly how much cash you’ll need so you can begin making a plan to save it. Calculate how much money you’ll need for a down payment, as well as other expenses like closing costs.
- Make a plan. Calculate how much you’re currently saving each month and how long it will take to reach your down payment goal. If that timeline isn’t as short as you’d hoped, you might want to take a look at your budget and see if you can find ways to cut back on your discretionary spending.
- Make your savings automatic. Once you’ve started making cuts, start putting money into a separate savings account that’s been earmarked for your down payment. Automate regular transfers to this savings account, and avoid taking money out of the account for anything other than a down payment.
The reality is most homebuyers need to have some money to put down on their home purchases. If you’re struggling to come up with a down payment, you probably won’t find many options for a down payment loan. And the options that are available may come with higher costs.
But by understanding how much you really need to save for a down payment and making some savvy spending and saving moves, saving for a down payment doesn’t have to be out of reach.