The notion of saving enough money for a down payment on a house can be incredibly intimidating. Will you ever save enough? And how much do you actually need? The short answer is your down payment should be somewhere between 0% and 25% of the house's purchase price. That's right, it's possible to buy a house with little to no money down and even subpar credit. Where you land within this range depends on several factors and your ability to qualify for assistance programs. 

What Is a Down Payment?

A down payment is an initial payment required to purchase a valuable item, in this case, a home. It's generally a percentage of the total purchase price of the house. The more you offer as a down payment, the lower your interest charges, and the less you'll spend overall. Ultimately, you'll save money on your home if you provide a larger down payment. 

Important Factors

Potential lenders take many factors into consideration when evaluating you for a loan. These include income, credit, down payment, and whether you're a first-time homebuyer. Your payment history is obviously an important consideration for someone who is about to lend you hundreds of thousands of dollars. Check your credit score regularly. Aim for on-time payments and low utilization (the ratio of your credit card balance to total credit limit) to improve your score. A high credit score shows a bank or other lender that you're a reliable borrower. If you have great credit, you're more likely to qualify for a lower down payment loan. A subpar credit score is not a deal-breaker, though. There are assistance programs available for those with mediocre credit that still offer lower down payments.  

First Time Home Buyers

Have you already purchased a home? "First-time buyer" could still apply to you. 

The term is used fairly casually. Anyone who hasn't purchased or owned a home within the last 3 years is usually considered a "first-time buyer." If this is you, you're in a sweet spot because there are numerous assistance programs at your disposal. 

FHA (Federal Housing Administration) loans are commonly acquired by first-timers or those with subprime credit. Individuals eligible for an FHA loan can pay as little as 3.5% upfront. Qualifying for this loan depends on your credit score: borrowers with a credit score of at least 580 qualify for a down payment of 3.5%, whereas those with scores between 500-579 qualify for 10% down. Do you think that sounds too good to be true? It might be. There are some restrictions and additional fees associated with this loan type. 

There are many other first-time buyer assistance programs out there. Most aid with closing fees (yes, there are costs in addition to the down payment), savings on interest, and down payment assistance. Consider all risks and benefits before making a big financial decision.   

Where Did The "20% Rule" Come From?

The mentality of saving at least 20% for a down payment is dated. Though there are benefits to putting this percentage down, it's no longer a steadfast rule. If you are able to save 20%, you can avoid paying PMI or private mortgage insurance. Lenders require this additional monthly charge for any down payment under 20%. It's basically their way of ensuring that a borrower will pay their loan back. As soon as you've paid the equivalent of 20%, PMI is removed. 

Are 0% Down Payment Programs Legit?

Yes, it is possible to purchase a house without putting a cent down. A few programs offer zero down payment loans, including The Department of Veterans Affairs, Doctor Loan Program, and U. S. Department of Agriculture Loans. These entities have special requirements to qualify but are legitimate.  

Ways to Save For a Down Payment

You've figured out how much you need for your down payment, but how will you save it? There are several ways to set aside extra cash to reach your down payment goals.

  • Eliminate Debt: Stop wasting money on interest charges by paying off debt. You'll also qualify for a lower interest loan with improved credit, which will save you more in the long run. Before you even start saving, consider eliminating credit card debt first. 

  • Budget: Create a strict budget and stick to it. Anything left after necessities should be put into savings for your down payment. Start by recording all expenses and recurring fees. Identify where you can make cuts (do you really need that monthly plant subscription? Daily Starbucks latte? Hulu add-on? That's $50/month you can save right there) and bid those luxuries farewell. It can be challenging to eliminate spending but keep your eye on the prize.  

  • Redirect Retirement Savings: If you are presently contributing to an IRA or 401(k), consider taking a short break. Instead, funnel those funds towards your down payment. This can be a temporary way to boost your savings. 

  • Invest Your Savings: Investing the money you've been saving for your down payment may seem risky, but it really depends on your timeline. If you plan on purchasing next year, it's probably not wise to invest the funds. However, if you're looking ahead 3 to 5 years, you can grow that nest egg quite significantly. Compound interest will allow your savings to grow with little to no work. 

  • Generate Extra Income: Find a side hustle to earn extra cash toward your down payment. Some easy ways to make fast cash include completing online surveys, house-sitting, dog-walking, tutoring, becoming a rideshare driver, or pickup a part-time job at a local business. Put this money directly into your savings.   

When it comes to deciding on a down payment amount, the more you're able to save, the better. That's not to say that you cannot buy a house if you aren't able to come up with 20% of the purchase price. Investigate down payment assistance and federal loan programs to bring your home-owning dreams to fruition