Purchasing a first home is an amazing, life-changing event for anyone, but the money aspect can be daunting and feel out of reach, especially when you lack enough cash in your savings account for a down payment. Keep in mind that prices for houses are expensive–in some cases very expensive–depending on the location.

     But the rise in home prices is just one issue. Many first-time homebuyers are burdened with heavy student loan debt or credit card debt, and rent can be a major expense too. So, how is an ordinary human with an ordinary financial situation supposed to save for a large down payment?

     If necessity is the mother of invention, now’s the time to get creative. Consider six ways people can and do pull together enough money to make a down payment on a first home.

Get a Loan type with a Lower Down Payment

     It is now common for homebuyers to use less than a 20 percent down payment when buying a new house. In the past, most lenders required that buyers come up with at least 20 percent of the purchase price or a larger down payment in order to be approved for a conventional loan. The logic behind this was that by having skin in the game, so to speak, the borrower would be more likely to make loan payments on time and take good care of the property since it represented such a large investment on their part. If push came to shove and foreclosure became necessary, there would at least be some equity built up (the original down payment plus any appreciation in value) which might offset any losses incurred by the lender.

     A 20 percent down payment on a $50,000 home used to be manageable, but now that home prices have increased, that same down payment is too much for most buyers. As you look for other loan options, remember to explore all your possibilities and not just settle for the first one you find. It’s true that you can get by with a lower down payment than 20 percent, but you will have to pay Private Mortgage Insurance (PMI). Most of the time, PMI comes at an annual rate between 0.5 and 1.5 percent of your loan amount, and you pay it as part of your monthly payment.

     You might be surprised to know that there are actually quite a few loan options available for people who can’t afford to put down a large down payment. In fact, according to the National Association of Realtors, the median down payment by first-time homebuyers was only 6 percent of the purchase price. So don’t feel discouraged if you can’t come up with 20 percent – you’re not alone!

     Most conventional loans will consider borrowers who put a minimum of 5 percent down, while federal government loans require even less. Federal Housing Administration (FHA) loans take a minimum down payment of only 3.5 percent, but you can sometimes go lower. There are also loan programs where the homebuyer only needs to put down 3 percent. USDA loans for home buyers in rural areas can also qualify for zero money down (depending on your credit score). Some veterans can even get VA loans with zero money down.

Get some Government Assistance

     Did you know that there are programs that offer down payment assistance to first-time homeowners? There are thousands of programs that offer grants, zero-interest loans, or low-interest loans to help homebuyers meet their down payment requirements. Down payment assistance programs are available to help extensive groups of home buyers, which can include veterans, school teachers, firefighters, first-time homebuyers, and low-income individuals. A few come from nonprofits, but the majority are from local governments, counties, and states. These still can take into account your credit report so make sure your debt payment history is in order.

     Although the programs vary significantly among localities and states, we can typically group them into four categories:

• Grants that do not need to be paid back.
• Loans that must be repaid alongside the primary mortgage.
• Loans that only have to be paid down when the home is refinanced or sold.
• Loans that are forgiven over a set period of time.

     Are you a first-time homebuyer who hasn’t owned a house in the past three years? If so, then these types of assistance may be available to help you buy your dream home. However, sometimes only low or moderate-income earners who are buying their primary residence in certain areas can qualify for this type of financing.

 Accept Family Gifts of Money

     You could also ask your parents or grandparents for help with the down payment. It’s not uncommon for adults to receive money from their families to put towards a first home purchase. In fact, across the country, parents who gift a down payment amount are giving their children an average of $32,000. In 2022, one in five homeowners used gifted money to buy property — often from family members.

     Many lenders don’t have a problem with gifts, as long it’s not the entirety of the down payment. If it is all from a gift, then you’ll need to provide extra documentation to show that gifted money doesn’t affect your debt-to-income ratio. It’s customary for each person can give another individual up to $16,000 annually without filing any sort of gift tax return. So if two parents gave their child this amount, a couple could have $60,000 for a down payment.

     A mortgage lender wants to be sure that you’re not receiving any gifts from just anyone, as this might change your debt to income ratio and thus jeopardize your mortgage application. For conventional loans, the only acceptable gifts are those coming from immediate family members or future family members (such as future in-laws). Friends, employers, or charitable organizations can gift the down payment to FHA buyers. But if anyone with an interest in the sale of the home gifts money for part of the purchase price, it can violate your loan program rules. This includes real estate agents and sellers. Sellers can contribute towards closing costs as part of the home price negotiations though.

Pro Tip

     If you’re depending on financial help from your parents or grandparents for the down payment, some lenders require you to obtain a “gift letter” clarifying that the money is being given as a gift and not as a loan.

Tap Into Your Retirement Account

     If you’re a prospective homebuyer and have been putting money in your retirement account, like an IRA or 401(k), you may be considering using those funds for your down payment. It’s a real possibility and one that shouldn’t be too quickly dismissed.

     If you’re a first-time homebuyer, as defined by the IRS as someone who hasn’t owned a primary residence in the past two years, you can withdraw up to $10,000 from an IRA without being charged early withdrawal penalties. This rule applies to each member of a couple for up to $10,000 over your lifetime. Check with your accountant or the IRS to determine if you would be required to pay income tax on the amount withdrawn.

     What about 401(k) accounts? Unfortunately, not every 401(k) plan is the same, so you’ll need to ask your employer about this possibility. Some plans do allow an individual to take out a loan from their own account with certain conditions set by the employer. The maximum amount you can withdraw and other fine print will be explained in further detail by your company’s 401(k) documentation if your company does offer this option. According to the tax code, you have ample time to repay the loan back into your 401(k).

Join the Gig Economy – Get a side hustle

     Gaining extra money through a side job is another time-tested method for first-time homebuyers to gain extra funds they need for a down payment, and it’s not as complicated as breaking into an IRA or asking family members for help. Fortunately, in today’s gig economy, there are many opportunities to work on your own schedule instead of someone else’s. The gig economy has been on the rise in recent years. In fact, 30 percent of American adults now work in the gig economy, often as a side hustle. And over a third of millennial homebuyers use their second-job income to fund their down payment requirement, according to the Federal Reserve.

     No one ever said that working a second job was going to be easy, but it’s important to remember that it is only temporary. Once you’ve saved up enough money for your down payment, you can quit your second job and go back to enjoying life. In the meantime, there are plenty of opportunities for gig jobs with companies like Uber, tutoring online, or Upwork. If you’re struggling to balance your current job with a side hustle, try taking on a part-time retail job instead – this way, you’ll have set hours and know exactly how much money you’ll be making. Lastly, selling some of your belongings (or creations if you’re an artist) is a great way to save money quickly. With the internet today, you can sell items online no matter where in the world you are located!

Get Yourself Into the Habit of Saving

     It’s tough to save up money, especially when costs are high and wages aren’t growing, and it’s nearly impossible to put anything away if you can barely make ends meet. Financial experts might claim it’s easy, but they don’t live your life—you know how hard it really is. Start with en emergency fund as a lot of the mortgage lenders out there also require you to have assets in the bank outside of your down payment.

     Overspending can become a vicious and costly cycle, preventing you from saving money for things like down payments and preventing you from keeping up with your regular monthly payments for other items. To help break this habit, sign up for any type of automatic savings plan offered by your employer. If that’s not possible, consider downloading one of the many apps created to assist with saving money; one example is an app that rounds up purchases and saves the change. Automating your savings will increase the likelihood of success.

     If that doesn’t appeal to you, another option is to limit your spending by instituting a self-imposed spending freeze. This only works if you are strongly disciplined, but it could be worth a try. You can also make monthly payments to yourself in the amount you need to save each month. Keeping your savings like small mortgage payments to yourself can get you more money than you realize!

     Keep up your savings goals, talk with lenders about the different loan products out there, and make sure the payments work for your situation. No matter which of these ways to save a down payment you prefer, remember your end goal: buying your own home. This will inspire you to keep going. First-time homeowners save for down payments every day, so if they can do it, you can too.