Buying your first home is a big step. While the process can be daunting, careful research and planning in the beginning will smooth the way and increase your odds of finding a home that fits your needs and your budget. When you’re thinking about buying a starter home, one of the first questions to ask yourself is how much you’ll need for a down payment.

Determine Your Budget

Your first step should be to decide how much you can afford to spend on a home. An easy way to establish your budget is to follow the 28% rule: your mortgage (plus taxes and insurance, which are typically paid through a mortgage escrow account) shouldn’t be more than 28 percent of your monthly gross income. From there, you can begin breaking down the costs of purchasing a home to estimate how much you should save for the down payment.

Once you’ve decided how much you can afford to spend on your mortgage payment, think about your other expenses. If you have other monthly debt payments, such as for auto or student loans, make sure you will be able to keep up with these in addition to the mortgage you’re considering. In addition, don’t forget about closing costs, which cover the fees associated with setting up your loan. Closing costs can range between 2 and 5 percent of a home loan.

Calculate Your Down Payment

Many homebuyers believe that you must have a 20 percent down payment. While this is typical of conventional mortgages that don’t require mortgage insurance, there are options that make buying a home attainable for those who don’t have access to that much cash. The average down payment for first-time homeowners is just 6%, and there are programs that allow homebuyers to pay just 3.0–3.5% down. If you’re eligible for a VA or USDA loan, then you could even buy with no down payment at all. Keep in mind, however, that when your down payment is less than 20%, you will need to make monthly mortgage insurance payments in addition to your mortgage principal and interest, property taxes, and homeowners insurance.

The size of the down payment you make on a home can make a big difference in the total cost of the loan over time. Aside from the question of mortgage insurance, the larger percentage you can put down, the lower your interest rate is likely to be and, in turn, the lower your monthly mortgage payments!

The Bottom Line 

Understanding all the costs of buying a home from the beginning can make the first-time home buying process smoother and more efficient. By understanding the tradeoffs that come with making a lower (or no) down payment, you can make an informed choice about how much to save before you shop for loans and make an offer. A trusted realty company can be your best ally during the homebuying process and can help you estimate your costs.