Do you look like a first-time homebuyer?

By Sarah Damon

Owning a house is part of the American dream, and the media keeps screaming that mortgage rates are at an all-time low, but how do first-time buyers come up with the cash?

Somehow many entry-level buyers manage to scrape together a down payment. The number of first-time buyers hit a record high 50 percent of all home sales in 2010, according to a recent National Association of Realtors (NAR) report. This was up from 47 percent in 2009, with a previous cyclical high of 44 percent in 1991 (NAR records go back to 1981).

First-time buyer profile

You might feel it's rude to ask your friends how they managed to save enough money for a house, and you're probably right to feel that way. But if you're curious how other people have done it, the NAR survey offers some insight into first-time buyer financing.

To make a down payment, first-time buyers used the following resources:

  • 74 percent used funds from savings accounts
  • 27 percent received a gift (usually from parents)
  • 9 percent received a loan from a friend or family member
  • 8 percent tapped their 401(k)
  • 6 percent sold investments

To finance the house, 95 percent got into a fixed-rate mortgage, with the majority (56 percent) financing with a FHA loan.

How to come up with a down payment

Let's examine the most popular ways people are saving for a down payment, and how you can use the same methods to save for your own home.

  1. Savings account. The majority of first-time buyers use money from their savings accounts toward a down payment on a house. There's no reason you can't do the same. Start researching where you'd want to live and how much house you think you'll need, and get some ballpark figures for what it will cost. Try to save 20 percent of the purchase price, but if that's not possible, shoot for at least 10 percent. 
  2. Gifts and loans. If you're lucky enough to have a parent or friend who is willing to help you with a down payment, you'll either need to receive the gift a few months before applying for the loan or provide a "gift letter" that states that the money is a gift. Even if you plan to pay back the Bank of Mom and Dad, the letter will make sure the "gift" isn't counted as a loan, which would be added into your total debt when calculating your creditworthiness.
  3. Selling investments. If you're close to your goal, and the perfect opportunity comes along, you could borrow from your 401(k) to make up the amount you lack or sell some stocks and bonds you might be holding. One caveat to borrowing from the 401(k): If you leave your job, you'll have to pay back the loan immediately.

It seems impossible to accumulate thousands of dollars when you're starting with nothing in the bank, yet people are out there doing it, and you can too. Open a high interest savings account specifically for your down payment for a house (be sure to compare savings rates). Keep close tabs on your income and expenses by creating a simple budget and sticking to it. Next, to grow your savings quickly, set up automatic transfers and direct any windfalls, raises or bonuses to your down payment fund.