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If you’re dreaming of a home of your own, pulling together a down payment is probably on your financial to-do list. That sum can seem hard to wrangle, but take heart: First-time homebuyers with good credit have an edge. They often can put just 3% down, and they have access to a host of down payment assistance programs. What’s more, there are other ways to gather cash for your property purchase.

In this guide, you’ll learn more about down payments and how to afford one for your first home.

What Is a Down Payment?

Simply put, a down payment is a sum of money, often a percentage of the purchase price, that a buyer pays upfront when purchasing a home or a car.

When talking about buying a home, many people believe that 20% in cash is required, but that’s not the case. Twenty percent is the figure needed to avoid paying PMI, or private mortgage insurance, but there are mortgages available with 3% or even 0% down payments in some situations.


💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.

How to Afford a Down Payment on Your First Home

There are many ways to afford a down payment on your first home. Below, you’ll learn some ways to save up and find low down payment options as well.

But first, consider some general ways to raise cash:

•   Start a side hustle to bring in more income. That could mean driving a rideshare, selling your ceramics on Etsy, walking dogs, or any number of other pursuits.

•   Sell your stuff. If you have gently used items, such as clothing, housewares, electronics, and jewelry, you might get cash by selling them.

•   Automate your finances. Have some money direct-deposited into savings with every paycheck. That can build your down payment, and the money doesn’t go into your checking account, where you might be tempted to spend it.

•   Make a better budget. If you’re not saving at all or as much as you’d like, evaluate your earnings, spending, and saving to optimize that. The 50/30/20 budget rule is one popular budgeting method.

Smart Ways to Save Up for a Down Payment

Here’s the lowdown on how to afford a down payment on a house. Read on before you go shopping for a mortgage.

1. Get a Low Down Payment Conventional Mortgages

Conventional loans, the most common type of mortgage, are offered by private mortgage lenders, such as banks, credit unions, and mortgage companies. If you can find one with a low down payment requirement, that can take some of the pressure off of accumulating a large down payment.

Some points to note:

•   Many lenders allow a down payment of 3% for a fixed-rate conventional conforming loan.

•   To qualify, borrowers usually will need to have a credit score of at least 620 and a debt-to-income ratio of 46% or less, though you might get approved with a DTI of 50%. Income limits may apply.

•   Putting 20% down, however, will allow a borrower to avoid private mortgage insurance (PMI) on a conventional loan.

2. Focus on Government-Backed Loans

If you are a low- to moderate-income borrower or have a lower credit score, you might want to pursue a government-backed loan, like an FHA, VA, or USDA mortgage. These also can have lower down payment requirements.

•   An FHA loan requires as little as 3.5% down on one- to four-unit owner-occupied properties as long as the borrower occupies the building for at least one year. To qualify for 3.5% down, your credit score must be 580 or higher. Someone with a credit score between 500 and 579 may qualify to put 10% down.

•   A VA loan, for veterans, active-duty military personnel, National Guard and Selected Reserve members, and some surviving spouses, requires no down payment. Borrowers can buy a property with up to four units, as long as the borrower occupies the property throughout the ownership. There is no stated minimum credit score, but generally speaking, lenders require a minimum credit score in the low- to mid-600s to qualify.

•   A USDA loan, for properties in eligible rural and suburban areas, also requires no down payment. Lenders typically want to see a credit score of at least 640, and household income can’t exceed 115% of the area’s median household income.

USDA and VA loans typically come with lower interest rates than conventional or FHA loans, but a USDA loan requires a guarantee fee, a VA loan requires a funding fee, and an FHA loan, upfront and annual mortgage insurance premiums (MIP). It pays to understand PMI vs. MIP to gain more insight onto the total costs of your loan.


💡 Quick Tip: A VA loan can make home buying simple for qualified borrowers. Because the VA guarantees a portion of the loan, you could skip a down payment. Plus, you could qualify for lower interest rates, enjoy lower closing costs, and even bypass mortgage insurance.†

3. Down Payment Gifts

“Hey, Mom and Dad (or Great-Aunt Beth), I’d love it if you gave me a large cash infusion to help me buy a house.” It just rolls off the tongue, right? But in fact, one or more loved ones may be willing to pitch in toward your down payment or closing costs. That could help lower the amount of cash you need to come up with.

Some details to know:

•   Under conventional loan guidelines, gift money for a principal or second home is allowed from someone related by blood, marriage, adoption, or legal guardianship, or from a domestic partner or fiance. There’s no limit to the gift, but conventional loans may require borrowers to come up with a portion of the down payment.

•   FHA guidelines allow gift money from relatives, an employer, a close friend, a charitable organization, or a government agency that provides homeownership assistance.

•   With USDA or VA loans, the only people who cannot provide gift funds are those who would benefit from the sale, such as the seller, lender, real estate agent, or developer. A mortgage gift letter signed by donor and recipient will be required, verifying that the down payment funds are not expected to be repaid. A lender may also want to track the gift money.

•   There are also gifts of equity, when a seller gives part of the home’s equity to the buyer to fund all or part of the down payment on principal or second homes. For FHA loans, only equity gifts from family members are acceptable. A signed gift letter will be required.

4. Crowdfunding a Down Payment

Crowdfunding to help buy a house? It’s possible with sites like GoFundMe, Feather the Nest, HomeFundIt, and even Honeyfund (which is set up as a crowdfunder for honeymoons). A couple of details to consider, because fees are often involved when you use these platforms:

•   GoFundMe charges 2.9% plus 30 cents per gift.

•   Feather the Nest isn’t associated with a mortgage lender, so donation seekers can decide where to go for a loan. It charges a fee of 5% for every contribution.

•   HomeFundIt charges no fees, but you must pre-qualify and then use CMG Financial for your home purchase. The site shows a money match toward closing costs for first-time buyers.

•   For Honeyfund, U.S. residents receiving U.S. dollars via PayPal are charged 3.5% plus 59 cents per transaction.

5. Retirement Account Withdrawals or Loans

It might be a good idea to explore all options for getting cash before tapping your 401(k) savings account.

As you probably know, taking money out of your 401k before age 59 ½, or before you turn 55 and have left or lost your job, is met with a 10% early withdrawal penalty and income tax on the amount. So withdrawing money early from this tax-deferred account has a painful cost and impairs long-term growth.

Here are other options if you want to tap retirement savings:

•   Borrowing from a 401k may be possible. Your employer’s plan might let you borrow money from your 401k and pay it back to your account over time, with interest, within five years, in most cases. You don’t have to pay taxes and penalties when you take a 401k loan, but if you leave your current job, you might have to repay the loan in full fairly quickly. If you can’t repay the loan for any reason, you’ll owe taxes and a 10% penalty if you’re under 59 ½.

•   A traditional IRA allows first-time homebuyers to take an early withdrawal up to $10,000 (the lifetime limit) to use as a down payment (or to help build a home) without having to pay the 10% early withdrawal penalty. They still will have to pay regular income tax on the withdrawal.

•   With a Roth IRA, if you take a distribution of its earnings before age 59 ½ and before the account is less than 5 years old, the withdrawal may be subject to taxes and penalties. You may be able to avoid penalties but not taxes if you use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.

If you’re under age 59 ½ and your Roth IRA has been open for five years or more, a withdrawal of earnings will not be subject to taxes if you use the withdrawal to pay for a first-time home purchase.

Recommended: First-Time Homebuyers Guide

First-Time Homebuyer Assistance Programs

Here’s another way to help make your home-buying dreams come true: State, county, and city governments and nonprofit organizations offer down payment assistance programs to help get first-time homebuyers into homes. (By the way, the definition of who qualifies as a first-time homebuyer is more expansive than it may seem.)

Down payment assistance may come in the form of grants or second mortgage loans with various repayment or loan forgiveness provisions.

HUD steers buyers to state and local programs, and the National Council of State Housing Agencies has a state-by-state list of housing finance agencies; each offers a wealth of information designed to boost housing affordability and accessibility.

First-Time Homebuyer Tips

As you save for your down payment, follow this advice to get ready to become a property owner:

•   Figure out how much house you can afford with a home affordability calculator. You want to budget appropriately.

•   Don’t forget to account for closing costs, which are typically 3% to 6% of your loan amount.

Check your credit score and credit report. Building your credit and eliminating any errors on your report can help you qualify for favorable rates.

Recommended: Most Affordable Places to Live in the US

The Takeaway

How to afford a down payment on your first house? Saving is, of course, part of the equation. But you may not need to accrue that 20% of the purchase price that so many people aim for. There can be mortgages available with as little as 3% or even 0% down. Also, first-time homebuyers may benefit from assistance programs, down payment gifts, and other forms of funding.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

How much should I save for a down payment on my first house?

While many people aim for a 20% down payment to avoid paying PMI, there are mortgages available to qualified buyers with as little as 3% or even 0% down.

Can I borrow money for a down payment on a house?

You might be able to find a personal loan to use for a down payment, or you could see if a relative or significant other has funds to lend you. Check with your lender to see if this source of cash is acceptable, though.

What credit score do I need to buy a house with no money down?

You’ll typically need a credit score of at least 640 for the 0% USDA loan program. VA loans with no money down (and low down payment FHA and conforming loans) usually require a minimum credit score of 580 to 620.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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An exchange-traded fund, or ETF, bundles many investments together in one package so it can be sold as shares and traded on an exchange. The purchase of one ETF provides exposure to dozens or even hundreds of different investments at once, and there are numerous types of ETFs on the market.

ETFs are generally passive investments, i.e. they don’t have active managers overseeing the fund’s portfolio. Rather most ETFs track an index like the S&P 500, the Russell 2000, and so forth.

ETFs are an investment vehicle that allows even small and less-established investors to build diversified portfolios, and to do so at a relatively low cost. But before you start buying ETFs, it’s important to understand how they work, the risks of investing in ETFs, as well as other pros and cons.

What Is an ETF?

An ETF is a type of pooled investment fund that bundles together different assets, such as stocks, bonds, commodities, or currencies, and then divides the ownership of the fund into shares. Unlike mutual funds, ETFs give investors the ability to trade shares on an exchange throughout the day, similar to a stock.

Unlike investing in a single stock, however, it’s possible to buy shares of a single ETF that provides exposure to hundreds or thousands of investment securities. ETFs are often heralded for helping investors gain diversified exposure to the market for a relatively low cost.

This is important to understand: Just like a mutual fund, an ETF is the suitcase that packs investments together. For example, if you are invested in a stock ETF, you are invested in the underlying stocks. If you are invested in a bond ETF, you are invested in the underlying bonds. Thus you are exposed to the same risk levels of those specific markets.

Recommended: Active vs Passive Investing

Passive vs Active ETFs

Most ETFs are passive, which means to track a market index. Their aim is to provide an investor exposure to some particular segment of the market in an attempt to return the average for that market. If there’s a type of investment that you want broad, diversified exposure to, there’s probably an ETF for it.

Though less popular, there are also actively managed ETFs, where a person or group makes decisions about what securities to buy and sell within the fund. Generally, active funds charge a higher fee than index ETFs, which are simply designed to track an index or segment of the market.


💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How Do ETFs Work?

As discussed, most ETFs track a particular index that measures some segment of the market. For example, there are multiple ETFs that track the S&P 500 index. The S&P 500 index measures the performance of 500 of the biggest companies in the United States.

Therefore, if you were to purchase one share of an S&P 500 index fund, you would be invested in all 500 companies in that index, in their proportional weights.

What Is the Difference Between an ETF and a Mutual Fund?

ETFs are similar to mutual funds. Both provide access to a wide variety of investments through the purchase of just one fund. But there are also key differences between ETFs and mutual funds, as well as different risks that investors must bear in mind.

•   ETFs and mutual funds have different structures. A mutual fund is fairly straightforward: Investors use cash to buy shares, which the fund manager, in turn, uses to buy more securities. By contrast, an ETF relies on a complex system whereby shares are created and redeemed, based on underlying securities that are held in a trust.

•   ETFs trade on an open market exchange (such as the New York Stock Exchange) just as a stock does, so it is possible to buy and sell ETFs throughout the day. Mutual funds trade only once a day, after the market is closed.

•   ETF investors buy and sell ETFs with other ETF investors, not the fund itself, as you would with a mutual fund.

•   ETFs are typically “passive” investments, which means that there’s no investment manager making decisions about what should or should not be held in the fund, as with many mutual funds. Instead, passive ETFs aim to provide the same return for the benchmark index they track. For example, an ETF for environmental stocks would mimic the returns of green stocks overall.

What Are the Advantages of ETFs?

There are a number of benefits of holding ETFs in an investment portfolio, including:

•   Ease of trading

•   Lower fees

•   Diversification

•   Liquidity

Trading

ETFs are traded on the stock market, with prices updated by the minute, making it easy to buy and sell them throughout the day. Trades can be made through the same broker an investor trades stocks with. In addition to the ease of trading, investors are able to place special orders (such as limit orders) as they could with a stock.

Fees

ETFs often have lower annual fees (called an expense ratio) — typically lower than that of mutual funds — and no sales loads. Brokerage commissions, which are the costs of buying and selling securities within a brokerage account, may apply.

Diversification

Using ETFs is one way to achieve relatively cheap and easy diversification within an investment strategy. With the click of a button, an investor can own hundreds of investments in their portfolio. ETFs can include stocks, bonds, commodities, real estate, and even hybrid funds that offer a mix of securities.

Liquidity

Thanks to the way ETFs are structured, ETF shares are considered more liquid than mutual fund shares.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

What Are the Disadvantages of ETFs

There are some potential downsides to trading ETFs, too, including:

Trading Might Be Too Easy

With pricing updated instantaneously, the ease of ETF trading can encourage investors to get out of an investment that may be designed to be long term.

Understanding ETF Costs

Even if ETFs average lower fees than mutual funds, a brokerage might still charge commissions on trades. Commission fees, plus fund management fees, can potentially make trading ETFs pricier than trading standalone stocks.

In addition, some ETFs can come with higher bid/ask spreads (depending on trading volume and liquidity), which can increase the cost of trading those funds.

Lower Yield

ETFs can be great for investors looking for exposure to a broad market, index, or sector. But for an investor with a strong conviction about a particular asset, investing in an ETF that includes that asset will only give them indirect exposure to it — and dilute the gains if it shoots up in price relative to its comparable assets or the markets as a whole.

What Are Common Types of ETFs?

The ETF market is quite varied today, but much of it reflects its roots in the equities market. The first U.S. ETF was the Standard & Poor’s Depository Receipt, known today as the SPDR. It was launched on the American Stock Exchange in 1993. Today, ETFs that cover the S&P 500 are one of the most common types of ETFs.

Since the SPDR first debuted, the universe of exchange-traded funds has greatly expanded, and ETF trading and investing has become more popular with individual investors and institutions. Although index ETFs — those that passively track an index — are still the most common type of fund, ETFs can be actively managed. In addition, these funds come in a range of different flavors, or styles.

Because of the way these funds are structured, ETFs come with a specific set of risk factors and costs — not all of which are obvious to investors. So, in addition to the risk of loss if a fund underperforms (i.e., general market risk), investors need to bear in mind that some ETFs might get different tax treatment; could be shut down (dozens of ETFs close each year); and the investor may pay a higher bid/ask spread to trade ETFs, as noted above.

With that in mind, ETFs can offer an inexpensive way to add diversification to your portfolio. Here are some common types of ETFs.

Index ETFs

These provide exposure to a representative sample of the stock market, often by tracking a major index. An index, like the S&P 500, is simply a measure of the average of the market it is attempting to track.

Sector ETFs

These ETFs track a sector or industry in the stock market, such as healthcare stocks or energy stocks.

Style ETFs

These track a particular investment style in the stock market, such as a company’s market capitalization (large cap, small cap, etc.) or whether it is considered a value or growth stock.

Bond ETFs

Bond ETFs provide exposure to bonds, such as treasury, corporate, municipal, international, and high-yield.

Caveats for Certain ETFs

A handful of ETFs may require special attention, as they may incur higher taxes, costs, or expose investors to other risks.

Foreign Market ETFs

These ETFs provide exposure to international markets, both by individual countries (for example, Japan) and by larger regions (such as Europe or all developed countries, except the United States). Note that ETFs invested in foreign markets are subject to risk factors in those markets, which may not be obvious to domestic investors, so be sure to do your homework.

Commodity ETFs

Commodity ETFs track the price of a commodity, such as a precious metal (like gold), oil, or another basic good. Commodity ETFs are governed by a special set of tax rules, so be sure to understand the implications.

Real Estate ETFs

Real estate ETFs provide exposure to real estate markets, often through what are called Real Estate Investment Trusts (REITS). Dividends from REITs also receive a different tax treatment, even when held within the wrapper of a fund.

Additional ETFs

In addition, there are inverse ETFs, currency ETFs, ETFs for alternative investments, and actively managed ETFs. (While most ETFs are passive and track an index, there are a growing number of managed ETFs.) These instruments are typically more complicated than your standard stock or bond ETF, so do your due diligence.

What Is ETF Trading?

ETF trading is the buying and selling of ETFs. To trade ETFs, it helps to understand how stocks are traded because ETF trades are similar to stock trades in some ways, but not in others.

Stocks trade in a marketplace called an “exchange,” open during weekday business hours, and so do ETFs. It is possible to buy and sell ETFs as rarely or as frequently as you could a stock. You’ll be able to buy ETFs through whomever you buy or sell stocks from, typically a brokerage.

That said, many investors will not want to trade ETFs frequently. The bid-ask spread — the difference between the highest price a buyer is willing to pay and the lowest price a seller will accept — can add to the cost of every trade.

A simple ETF trading strategy is to buy and hold ETFs for the purpose of long-term growth. Whether you choose a buy and hold strategy or decide to trade more often, the ease of trading ETFs makes it possible to build a broad, diversified portfolio that’s easy to update and change.

Risks of Trading ETFs

As noted in the discussion about common types of ETFs, it bears repeating that some ETFs can expose investors to more risk — but all exchange-traded funds come with some degree of risk. For example, investing in one of the most common types of ETFs, an S&P 500 ETF which tracks that index, still comes with the same risk of loss as that part of the market.

If large-cap U.S. stocks suddenly lose 30%, the ETF will also likely drop significantly.

This caveat applies to other asset classes and sectors as well.

3 Steps to Invest in ETFs

If you want to start investing in ETFs, there are a few simple steps to follow.

1. Do Your Research

Are you looking to get exposure to an entire index like the S&P 500? Or a sector like technology that may have a different set of prospects for growth and returns than the market as a whole? Those decisions will help narrow your search.

2. Choose an ETF

For any given market, sector, or theme you want exposure to, there is likely to be more than one ETF available. One consideration for investors is the fees involved with each ETF.

3. Find a Broker

If you’re already trading stocks, you’ll already have an investment broker that can execute your ETF trades. If you don’t have a broker, finding one should be relatively painless, as there are many options on the market. Once your account is funded, you can start trading stocks and ETFs.

How to Build an ETF Portfolio

Are you willing to take on more investment risk to see more growth? Would you prefer less risk, even if it means potentially lower returns? How will you handle market volatility? Understanding your personal risk tolerance can help you choose ETFs for your portfolio that round out your asset allocation.

For example, if you decide that you would like to invest in a traditional mix of stocks and bonds at a ratio of 70% to 30%, you could buy one or several stock ETFs to gain exposure to the stock market with 70% of your money and some ETFs to fulfill your 30% exposure to the bond market.

The risk factors of equity and bond ETFs are relatively easy to anticipate, but if you venture into foreign stock ETFs, emerging markets, or gold and other commodities, it’s wise to consider the additional risk factors and tax implications of those markets and asset classes.

Once you’ve determined your desired allocation strategy and purchased the appropriate ETFs, you may want to take a hands-on approach when managing your portfolio throughout the year. This could mean rebalancing your portfolio once a year, or utilizing a more active approach.

The Takeaway

ETFs bundle different investments together, offering exposure to a host of different underlying securities in one package. There’s likely an ETF out there for every type of investor, whether you’re looking at a particular market, sector, or theme. ETFs offer the bundling of a mutual fund, with the trading ease of stocks, although the total costs and tax treatment of ETFs require some vigilance on the part of investors.

Though a DIY approach to investing using ETFs is doable, many investors prefer to have the help of a professional who can provide guidance throughout the investment process.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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