The good news? There is no “rule” that you have to save 20% for a down payment on a house. Today, homebuyers purchase with as little as 0 to 3.5% down, depending on the loan program. That means homeownership may be closer than you think.
You don’t need 20% down to buy a home
A large down payment has benefits if you have it. It can give you the potential for higher home equity, a lower mortgage payment, and avoiding paying monthly private mortgage insurance (PMI). But plenty of loans with a low or no down payment exist, and there are also options for decreasing it.
According to the most recent Profile of Home Buyers and Sellers, the median down payment is 18% overall and just 9% for first-time buyers. Many successful homeowners started with far less.
8 smart ways to lower your down payment
Here are several strategies to consider:
1. Understand your 401(k) options
Some buyers use retirement funds to purchase a home. Today, there are two common ways to access 401(k) funds:
- 401(k) loan: Borrow from your account and repay yourself over time, often without tax penalties
- Hardship withdrawal: May trigger income taxes and penalties, depending on circumstances
You can use a 401(k) loan strategically when selling one home and buying another. However, it’s important to weigh short-term benefits against long-term retirement goals.
Looking ahead: There has been discussion at the federal level about potentially expanding access to retirement funds for down payments, but details are still unclear. For now, homebuyers should focus on the options currently available and consult a financial professional before using retirement savings.
2. Ask about a USDA or VA loan
Veterans and active-duty military may qualify for VA loans with zero down payment, while USDA loans offer the same benefit for buyers in eligible rural and suburban areas. If you’re not military-affiliated and are willing to live outside a city, try searching USDA-eligible homes to eliminate your down payment. USDA loans typically come with a lower interest rate compared to conventional loans.
3. See if you’re eligible for down payment assistance (DPA)
There are thousands of programs that offer financial help with down payment/closing costs. Most vary by location. Some programs offer a percentage of a loan’s value that can be put toward a down payment; normally, income and home price limits apply. Just ask your loan officer for details.
How can we help? Contact your Cornerstone loan officer to find out which DPA programs you may qualify for.
4. Look into new construction credits
When purchasing a newly built home, some builders offer closing cost credits when a buyer chooses to work with their preferred lender. These credits can be applied toward closing costs or used for an interest rate buydown, helping lower your monthly payment. While you can’t use the credit toward your down payment, it can help reduce the cash needed at closing, freeing up extra funds.
5. Ask for seller credits
A seller can’t pay your down payment directly, but they may be able to contribute toward your closing costs, decreasing the cash you need at closing. The allowable seller credit varies by loan program and market conditions.
Your loan officer can help you understand program limits, evaluate whether a seller credit makes sense, and explore how it may be combined with options like an interest rate buydown to maximize your buying power.
6. Use gift funds
Family members can gift up to $19,000 per person annually without triggering a gift tax, and married couples can combine their limits to gift $38,000 together. This means parents could potentially gift $38,000, while grandparents could also contribute the maximum amount. When using gift funds for a down payment, a signed gift letter and bank documentation verifying funds may be required.
Families can also leverage the Unified Tax Credit, which allows individuals to gift amounts above the annual exclusion without paying immediate gift taxes. This lifetime credit applies to both gift and estate taxes and can be a helpful option for parents or grandparents who want to provide larger assistance for a home purchase while managing long-term estate planning goals.
7. Look into employer assistance
Some employers offer homebuyer assistance programs as part of their benefits packages, providing low-interest loans, matching funds, or cash assistance. For example, companies that partner with Cornerstone may offer a homebuying incentive, like a closing credit that can offset some upfront costs of homeownership. Check with your HR department to see if your employer offers homebuyer benefits.
8. Save your tax refund
Tax refunds can boost your down payment fund, with the average refund amount exceeding $3,000. This could cover a substantial portion of your down payment or closing costs, especially when combined with a low down payment loan program. If you’re planning to buy a home, consider adjusting your tax withholdings now to maximize your refund and create a built-in savings plan.
Want to explore your down payment options?
Connect with a Cornerstone loan officer to learn which low or no down payment loans and down payment assistance programs you may qualify for.
Sources deemed reliable but not guaranteed. For educational purposes only. Cornerstone Home Lending does not provide tax advisory services. Please contact a qualified professional for specific guidance.