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How to Save for a Down Payment on Your First Home

by Rebecca Lake

Buying your first home is a big step, but before you start cruising property listings, there's one important thing to think about: your down payment. The down payment is an initial amount of money you pay to the lender up front. The more you put down, the less you'll need to finance. Not sure how much you need? Here are some things to consider.

Set your down payment goal

The general rule of thumb for a down payment on a conventional mortgage – meaning a loan that isn't insured by the federal government – is 20% of the purchase price. And there are benefits to saving up that amount, says Ryan Frailich, a New Orleans-based financial planner and founder of Deliberate Finances. "The biggest reason first-time buyers should put 20% down is that it means they've established the habits necessary to save a large chunk of cash and work towards a goal that seems far away," he explains.

But that percentage is hardly set in stone, and many homeowners opt for a smaller amount. In fact, over the past three years, the median down payment for first-time buyers hovered around 6%, according to the National Association of Realtors*.

Glenn Carter, CEO of the Casual Capitalist, said he set his sights well below the 20% mark when buying his first home, choosing to put down 5% instead. That's a decision he says he doesn't regret. "Even if I had more savings, I would likely have only put the 5% down and used the remainder for improvements or other projects," he says.

Michael Schaeffer, a broker associate with Colorado-based LIV Sotheby's International Realty, agrees that a smaller down payment may make sense for first-time buyers. "Most first-time buyers don't have the cash for a substantial down payment, plus the reserves required by lenders to qualify for a mortgage," he explains, which makes low down payment financing their only option. Even if a buyer has 20% to put down, he adds, they should think about whether they'll have enough cash to cover immediate fix-up needs, longer term maintenance and unexpected emergencies.

Your credit score can also help shape your down payment decision, says Crissy Saenz, a real estate agent with Rodeo Realty in Woodland Hills, CA. For example, with an FHA loan – or a mortgage insured by the Federal Housing Administration - buyers whose credit scores drop below 580 are expected to put 10% down, rather than the standard 3.5%. Location can also determine how much money you'll need to save. "If you're aiming towards a high-demand area, the property values are most likely higher than surrounding areas," she explains. "Higher asking prices mean a higher down payment."

The type of mortgage matters

With certain types of mortgages, such as VA or USDA loans, buyers aren't expected to put down anything at all. However, these loans often have narrow eligibility guidelines, which means they may not be right for everyone. FHA loans, by comparison, may be easier to qualify for and the traditional minimum down payment is 3.5%, which may be more feasible for first-time buyers.

That said, it's possible to get a conventional loan with less than 20% down. The catch is that private mortgage insurance (PMI) will likely be added on to the mortgage. PMI protects the lender in case you default. (FHA loans also include private mortgage insurance.) The premiums for this insurance are rolled into your mortgage, meaning you end up paying more for the loan over time. You may want to consider whether it makes sense for you to part with more cash up front or go with a smaller down payment and pay PMI.

Ways to find money for a down payment

Saving regularly is one way to raise funds for a down payment, but that route may take time. A 2016 survey* conducted by Apartment List found that in pricier markets, it can take younger buyers a decade or more to save up a 20% down payment. So what other options are there?

Related: 6 Ways to Prepare for a Large Purchase

One option is down payment assistance programs, which offer qualifying buyers cash they can put towards a down payment. According RealtyTrac*, these programs could save the average buyer more than $17,000 on average. Depending on the program's rules, you may have to meet certain income guidelines to get help.

Asking a family member to give you the money for a down payment is another option. The money must be a gift, though; lenders won't let you use borrowed funds for a down payment.

Finally, you could think about tapping your retirement accounts. You can withdraw up to $10,000 penalty-free from an Individual Retirement Account (IRA) to put towards the purchase of a first home. Just remember that you may have to pay taxes on the money.

Don't forget about other home buying costs

While your down payment may be the biggest expense on your mind, it's not the only thing you need to prepare for. There are also the closing costs, including any money you may need to set aside in escrow for property taxes and homeowners insurance. On average, closing costs run between 2% and 5% of the purchase price.

Related: The True Cost of Buying a Home

Brian Davis, a real estate investor and co-founder of SparkRental.com, says buyers can cut down on their out-of-pocket expense by negotiating a seller concession to cover closing costs. "If the buyer's closing costs are covered by the seller, they can put their cash toward a down payment and potentially have money left over," he says.

Saving up for the down payment can be a major hurdle for first-time home buyers, but with some proper planning and saving, you can find the solution that works best for you. To learn more about what to consider when buying a home, check out Citi's home ownership site.

*Remember to always check the app terms and privacy policy before downloading these or any other apps and make sure you understand and are comfortable with the types of information collected and how it is used.

Rebecca Lake has been writing about insurance, personal finance, and small business for nearly a decade. Her work has been featured on a number of top finance sites.

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