Home · December 17, 2020

Making the Typical Down Payment on a House Isn't Your Only Option

Homeownership is on many people's list of life goals, but coming up with the typical down payment on a house can feel out of reach for many. Depending on home prices in your area, the amount you need may be quite a bit more than you've ever saved before, and building that amount of savings might seem a long way off.

Don't let a large down payment stop your journey to homeownership. Instead, learn about these strategies to lower the amount you need to come up with and save the money sooner.

Understanding the standard down payment

A down payment is an upfront amount of money out of your own pocket that's needed to purchase a home with a mortgage loan. Traditionally, this amount is 20% of the home's asking price. There are a number of good reasons for this.

For starters, putting less than 20% down on a home may make lenders consider your loan more risky. This means they'll require you to pay additional monthly insurance with your overall mortgage payment. Having a 20% down payment means you'll avoid paying this private mortgage insurance, also known as PMI.

Putting the typical down payment on a house may also help decrease the amount you'll pay overall, because higher down payments can decrease your mortgage loan interest rate. And because a higher down payment means you'll be taking out a smaller loan, your calculated monthly mortgage payment may be more affordable. 

Options beyond 20%

That said, it's possible to make a smaller down payment—sometimes, without any significant financial consequences.

Different types of home loans require different down payment amounts. While conventional loans may require a 20% down payment, VA and USDA loans don't require any down payment. Also, FHA mortgage loans allow lower down payments, though you may still be required to pay a different type of mortgage insurance.

Another way to make your down payment smaller is to sharpen your negotiation skills. Remember that a lender's down payment requirement is a percentage of the sales price. Get a thorough inspection report on the home as well as quotes on repair costs for anything that comes up, then use this information to give you a solid negotiating position when asking for a lower sales price.

Whether you'll need $20,000 or $80,000, coming up with that much can seem out of reach. Let's discuss some strategies for where you can find the money.

Savings strategies for your down payment

The specific down payment you'll need depends on the home you want to buy, the type of mortgage loan and the loan terms you hope to get. That said, there are some strategies that can help any homebuyer fund their down payment.

Retirement accounts

The first option is to withdraw some or all of the funds from a retirement account. There are different rules, timelines and amounts you can withdraw for different types of retirement accounts, such as traditional IRAs or Roth IRAs.

  • Traditional IRA: First-time homebuyers can withdraw up to $10,000 from their traditional individual retirement account to put towards a down payment. However, you'll have to pay income taxes on the loan amount.
  • Roth IRA: If you've been contributing to a Roth individual retirement account for at least 5 years, then you can withdraw your contributions penalty and tax-free.
  • 401(k): Any withdrawal from a 401(k) is considered a loan you'll need to pay back, with interest. You may have up to 5 years to pay this back, or less, depending on your plan's rules. Also, if you were to leave your job or be laid off, you'll likely have to pay the loan back within a short amount of time.

Piggyback loans

A piggyback loan is a second strategy to consider. You may be able to avoid paying PMI by working with your lender to source a second loan that will give you enough money for that 20% down payment. Just be sure that the interest you'll pay on this second loan is less than the monthly mortgage insurance amount you'd have to pay with just the first mortgage.

Finally, you can save for a down payment much faster if you're earning as much interest on the money as possible. Consider shopping around for a higher savings account interest rate, or even looking into buying certificates of deposit (CDs) to get higher interest rates than a savings account can offer.

You shouldn't let the 20% typical down payment on a house stop you from becoming a homeowner. Instead, use the options available to you to rethink what percentage makes sense for you. Then, come up with a plan of action to make your dream a reality.

Explore more down payment options

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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.