According to the National Association of Realtors, it takes two and half years for the average homebuyer to accumulate a down payment, even when home prices are rising. How do you do it?
- live in a cheap apartment
- add to savings every month
- crunch your budget to the bone
To find out how much you need to save for a down payment, ask a mortgage lender to review your income and debts to determine the amount you could borrow. With an FHA loan, you pay as little as 5 percent down.
Coming up with 15 or 20 percent of a $250,000 house is daunting yet possible, if you know what to do and where to look.
- Pay off your credit cards. Start with the one carrying the highest interest and balance and work your way down. It helps for your credit score and frees up money to put into savings.
- Ladder CDs to boost savings. Certificates of deposit are low risk and fairly accessible, but don't always earn great returns when interest rates are low. To get around that, portion out your money into three-month, six-month, and one-year certificates. Known as laddering, this practice gives you the flexibility to adjust your savings as rates change. You can lock in rates when they're high, and when rates are low, you can save them from being stuck there too long.
- Use special programs. Many federally funded mortgage programs, such as Fannie Mae and Freddie Mac, can get you a loan with less than 20 percent down. State agencies may be able to assist monetarily as well. Local non-profit and community groups often contribute to those unable to finance the down payment themselves.
- Borrow from your IRA. You are permitted by law to use up to $10,000 from your IRA for your down payment. If married, your spouse may also withdraw the same amount, giving you a nice little nest egg. Technically, you (both) must be first-time homebuyers. If you aren't, the law states that as long as you haven't owned your principal residence for the two years prior to buying the new house, you are okay. You don't have to pay a penalty for early withdrawal in this case.
- Take out funds from your 401(k). If you use this money for a down payment, you will have to pay it back with after-tax dollars. This ends up being a larger amount than you took out since you initially contributed with before-tax dollars.
- Receive a gift. You may receive several thousand dollars a year in the form of gift funds without you or the giver being taxed. This number, called the gift-exclusion amount, is adjusted annually according to inflation rates (check with the IRS). Most loan programs, even those with special terms, allow some or all of your down payment to come from gift funds from family or friends. However, you may be asked for a note from the benefactor verifying that the money needs not be repaid.
- Ask for a raise. If you are in a position to do so with good results, go for it.
- Get a second job. Part time work is a way to supplement your income. You might keep it to yourself at your primary job, though. Many companies frown on moonlighting, even if it isn't in competition with your type of business.
- Look for forgotten treasure. Many people have long forgotten savings bonds lying around. If these are still earning interest, find out the worth and start keeping track, or cash them in. It's basically “found money.”
- Sell your stuff. We all have stuff that's collecting dust when it could be collecting down payment dollars. Dig it up and move it out. Ebay is great for auctioning just about anything, and your local PennySaver just loves to advertise items for sale.
The point is, you can find or save money if you are focused on doing just that. Before you know it, you'll be making an appointment with a lender to discuss purchasing your new house. 
There are many special programs specifically for first-time buyers. While program details vary from state to state, most provide below-market-rate mortgage money to eligible borrowers who meet specified income and purchase-price limitations.
Sometimes program funding is limited, and sometimes only a small number of qualified borrowers obtain financing through them. But this isn't true of every program, so look around. There is an effort in Congress to eliminate or severely restrict the use of tax-exempt bonds that provide financing for these programs. So there's a chance that available funds for first-time buyers will be more restricted or may not be available at all. But for now, there are several programs for first-time buyers (availability may be limited by state).
Urban Homestead Act Program - offers federally owned, one-to-four-unit family residences for sale to first-time buyers (or buyers who are not current homeowners) for a nominal fee. Priority is given to applicants whose income is at or below average for the area. Requirements for this program:
- Property must be owner-occupied, usually for five years
- Buyer must have a good credit history and proof of employment
- Buyer must agree to repair and maintain the property
This program is not available in all communities; to inquire about your area, contact the U.S. Department of Housing and Urban Development (HUD) Regional Field Office.
Community Home Buyer Program - lowers down payment requirements to 3%, all of which must come from the homebuyer. Gift funds may be used for closing costs and for as much as 3% of the sale price. You are required to take a class on homeownership and once you complete the class, you receive a certificate that further reduces the cash requirement and broadens the qualification ratios.
FHA (Federal Housing Administration) Though not geared specifically to first-time buyers. FHAs do allow low down payments and easier qualifying. You may use gift funds from your family or employer for the entire amount of the down payment and closing costs. Qualified buyers may assume FHAs.
VA (Veteran's Administration) mortgages assist with down payments and other costs. For qualifying Veterans, National Guardsmen, or Reservists, the VA provides 100% financing, although currently only in fixed-rate terms. A one-time funding fee is added to the loan: 2% for first-time users and 3% for second time or more. Qualified disabled Vets may have this fee waived. VA loans may also be assumed.
HFA (Housing Finance Authority) loans, usually offered by state agencies, use special bond issue funds to provide funds at a lower interest rate. They are often offered as FHA, VA, or conventional loans, with a rate lower than the current market. Funds are sometimes limited and not always available. An HFA may not be combined with any other bond issue programs. A lender can inform you on filing and availability.
MCC (Mortgage Credit Certificate) is a government bond program that offers a tax advantage instead of a lower interest rate. It is used with other loan programs with the exception of HFAs, since neither program allows it. Homebuyers may find MCCs more effective than lower interest rate programs:
- The tax advantage sometimes does more to lower the overall housing expense.
- It allows you to select from a broader range of mortgage programs.
Drawbacks include limited funding by state and the inability to be used with other bond issue programs.
No Mortgage Insurance Loans are ideal for first-time buyers who live in high housing-cost areas:
- There's no limit to maximum earnings.
- They allow low down payments and eliminate mortgage insurance when you have as little as a 5% down payment.
The loan isn't restricted to first-time buyers and caters to those with good credit and 5% of their own money for down payment.
The seller provides some of the money needed to complete the sale. Seller financing is most common when high interest rates make it difficult for buyers to qualify for mortgages. This arrangement can facilitate transactions that might not otherwise occur.
The up side: the buyer is able to complete the purchase, and the seller doesn't have to lower the price.
The down side: most seller financing involves a relatively short-term note (usually three to five years). The buyer may pay interest only during the loan period, but will have a balloon payment at the end, which means that the entire principal amount borrowed from the seller will have to be repaid all at once. Unless an anticipated windfall will make a lump-sum payment possible, the buyer needs to find some other means of repaying the loan.
The assumption is that the buyer will be able to refinance the bank mortgage to obtain the funds needed to repay the seller. But if the property hasn't appreciated much, or the buyer still can't qualify for a larger loan, then both buyer and seller are going to have a problem.
- The buyer could be forced to sell the house (or lose it in foreclosure) to pay off the seller.
The seller, who may have been counting on the nice lump-sum payment, may have to decide whether to extend the loan or take back the house.
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