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3 Best Ways to Pay for a Down Payment on a Home

By Aly Yale – Dec 11, 2021 at 10:00AM

Key Points

  • There are many ways to pay for a down payment, including 401(k) loans, gift money, savings, and more.
  • Crowdfunding is also becoming a popular way for buyers to cover their down payment costs.
  • Many state and local housing agencies offer down payment assistance, which can help reduce or even cover your down payment costs entirely.

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Down payment costs are rising. How will you pay for yours?

As home prices skyrocket, down payment requirements jump too. In November, the median home price was a whopping $379,000. Even with a low-down payment FHA loan (3.5% is required), that'd come with a down payment of over $13,000 -- hardly pocket change for most homebuyers.

So how should buyers pay for these ever-growing costs? There are lots of options, but here are the best three.

Two people buying their first home.

Image source: Getty Images

1. Savings

If you can cover your down payment costs with savings, that's ideal. It won't come with any interest costs or application process, and you can easily obtain the payment through your bank or credit union.

You'll just want to make sure you still have plenty left over for emergencies. Most financial experts recommend having at least six months of expenses on hand. As a homeowner, you'll need enough to cover your mortgage payment, utilities, taxes, and other bills, as well as any unforeseen repairs that might crop up.

Keep in mind: You can also use a low-down payment loan program to minimize the savings you'll need to fork over. Many loans require as little as 3% down. (If you qualify for VA and USDA loans, the down payment required is zero.)

2. Down payment grants and assistance programs

Many states and municipalities offer down payment assistance programs that can help cover your costs. These vary by locale and are often reserved for lower-income buyers, but if you qualify, they could cover part or even all of your upfront down payment (and closing costs too).

In some cases, this assistance may need to be repaid, though usually, the repayment requirement is waived as long as you stay in the home for a certain number of years. And with other programs, your assistance may actually be a grant, meaning it never needs to be repaid at all.

To find a program in your area, contact your state housing agency, or use the Department of Housing and Urban Development's state housing guide.

3. Crowdfunding

Crowdfunding is becoming an increasingly popular way to fund down payments. Many people are asking for donations in lieu of graduation or wedding gifts (a friend of mine did this just last month!), and others are setting up full-scale crowdfunding campaigns on sites like GoFundMe or Feather the Nest. They'll then tap their friends, family, and social network for contributions until they reach their goal.

A similar option is getting straight-up gift money. Your mom, dad, siblings, aunts, uncles, or grandparents can write you a check for the down payment, and you can use those funds on closing day. As long as it's not a loan (meaning it doesn't need to be paid back), it's usually allowed by most loan programs and lenders. They'll just need to write a letter asserting it's a gift and that they don't expect repayment.

The many ways to pay

Of course, these aren't the only ways to pay for a down payment. You can also take out a loan from your 401(k), ask for help from your employer, or use your tax refund if it's big enough. If you're selling a home and buying a new one, you might even use the profits from your previous sale to cover the costs.

The best option really depends on your unique situation, real estate goals, and budget. If you're not sure, talk to a financial advisor or mortgage broker for guidance in determining the best down payment method for you.

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