You don't have to put down 20% on a home—here's when a smaller down payment makes sense

The cost of purchasing a home is steep, but it may not be quite as expensive as many people think.

A report from the National Association of Realtors (NAR) found the median down payment amount in 2022 was 13% of the home's purchase price. Younger homebuyers put down even less — 8% among younger millennials (age 23-31) and 10% among older millennials (32-41). While this still represents a major financial commitment, these types of down payments are far less than the 20% that nearly half of Americans who have never owned a home believe is necessary (according to a survey from LendingTree).

Below, CNBC Select looks at when making a smaller down payment makes the most sense and offers guidance on how to save for what's still a big purchase.

In a market where prices are rising, first-time homebuyers (and those with a limited budget) may want to become homeowners sooner rather than later.

In 2022, home prices climbed exponentially faster than income, with monthly mortgage payments on a standard starter home increasing by 49% from a year ago, according to the NAR. Home price growth only began to cool down toward the end of the year due to rising mortgage rates. It makes a certain amount of sense that people ready to buy a home would do so now before they're priced out — even if that means skimping on the down payment and potentially taking on private mortgage insurance (PMI) payments and higher interest rate charges.

Making a smaller down payment also gives you some wiggle room to use your extra cash for home repairs, closing costs, emergency expenses, moving costs and more. So if that house you're eyeing is a real fixer-upper and know you'll need to spend money on home improvements, consider your options and decide if a smaller down payment is worth the trade-offs.

You might also consider exploring down payment assistance programs, which are typically targeted toward first-time homebuyers. Grants are one form of DPA. They're available through some banks but you should also check to see if your state offers any grant programs. Iowa, for instance, has a FirstHome program that offers a $2,500 grant to help eligible residents make a down payment and closing costs.

Loans are another form of down payment assistance but unlike grants, they do need to be paid back. Essentially, it's like taking on a second mortgage since you're borrowing money for a down payment in addition to borrowing money to pay for the rest of the home.

FHA loans also generally require lower down payments of at least 3.5%, unlike conventional loans, which typically require down payments in the 5%–20% range. CNBC Select evaluated the best mortgage lenders for those looking to buy a home with a lower down payment. We ranked Chase Bank as the best for flexible payment options, Ally Bank as the best for no lender fees and Citibank Mortgage Account as the best option for no PMI.

Saving for a down payment and home purchase can seem like a daunting task. Here are some steps to get you moving in the right direction: 

Automate your savings

One of the easiest ways to prioritize saving in your budget is to have a portion of your paycheck automatically deposited into an account. This way, you can prioritize saving for the home before you spend money on anything else.  

Opt for a high-yield savings account to earn more money on the funds you save. Select ranked LendingClub LevelUp Savings as its top overall pick for accounts with high APY. The Varo Savings Account may also be a good option for its uniquely tiered APY program that encourages extra savings. Granted, you likely won't earn hundreds of dollars in interest payments each month but it's still a lot better than earning nothing at all.

Save your bonuses and tax refunds

While it may be tempting to splurge on your next vacation, putting bonuses toward a down payment is one of the fastest ways to reach homeownership. A bonus can range from a couple of hundred dollars to several thousand depending on your occupation and company. Because bonuses are considered extra income on top of your regular salary, you may be less likely to rely on them for day-to-day expenses and can build up a down payment without affecting your current lifestyle.

Likewise, another smart move is saving your tax refunds. As of Feb. 3, the average tax refund amount this year is $1,963. Allocating that check toward your down payment can be a more effective savings strategy than adding up small amounts at a time.

Consider additional sources of income

If you don't have any extraneous spending you can cut back, you may need to increase your income to reach your savings goal. That could mean taking on extra hours at work (as long as you have the capacity and aren't risking your mental health). You could also think about selling items that you may no longer use or need such as clothes or electronics. 

The choice to make a higher or lower down payment depends on a variety of factors and personal circumstances. 

During this time, some may focus their energy on saving as much as possible for a higher down payment to potentially reduce the loan amount and lower their monthly payments. In other cases, making a lower down payment can make homeownership more attainable by allowing you to enter the housing market sooner.

Before making any decision, you should research different loan options and find the best rate and terms for your situation. 

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