One of the biggest obstacles to becoming a home owner is coming up with the down payment. Here are 5 tips to help you build up your down payment money and attain your home ownership dreams!
The down payment: It’s the biggest test of our ability to save money most of us will ever face, and one that stands between us and our ability to become a homeowner.
It can be tricky, but down payments can be seen as an opportunity and less of an obstacle.
The more money you have to put down, the more choice you’ll have in terms of purchase price range and monthly payment amount. And building a little cash cushion will definitely give you piece of mind once you’re in your home.
Here are a handful of lesser-known sources for boosting your down payment stockpile.
1. Lean on your city
Gone are the times when nationwide programs allowed for the zero-down loan, the federal homebuyer tax credit, and the use of tax credit funds toward down payment and closing cost requirements.
Where have all the down payment assistance programs gone? Local.
The best programs of this sort are now largely operated by local governments, primarily cities and counties — and the rules for qualifying vary widely. Some operate exclusively for buyers with low or moderate incomes; others are dedicated to helping first-time homebuyers. Many of these programs have a limited pool of funds that may run out over the course of the fiscal or calendar year, and almost all of them require buyers to jump some major hoops, such as completing homeowner education classes and choosing a home that meets specified criteria.
Some state and local programs in areas that were particularly hard-hit by the 2008 recession also offer bonuses for buyers who agree to purchase a bank-owned home or a property in a designated economic recovery zone.
Google your city, county, and state websites, and look for links for residents, housing, or homebuyer assistance to find these programs. And be sure to trust only websites that end in .gov — scammers posing as governmental agencies abound. Local real estate agents and mortgage brokers often know the ins and outs of these programs too.
2. Get by with a little help from your friends (and relatives)
Most mortgage programs will allow for some portion of your down payment to come in the form of “gift money,” which is exactly what it sounds like: money someone gives you to help you buy a home. And while gift money may sound great, taking gift money from a relative can create relationship issues or come with emotional strings attached.
It also typically comes with lender strings attached. Lenders frequently require that gift money be accompanied by a letter that clearly states the money is a gift, not a loan. The lender may also want to see a bank account statement from the giver proving that the money was theirs to give.
Most may think of gift money as large gifts allowable exclusively in the context of a familial relationship, but some programs allow any general well-wisher to contribute any amount to your cause, whether or not they are a relative. The FHA Bridal Registry program allows couples to open a down payment registry account with their lender and to deposit checks into that account from anyone who wants to contribute to helping a couple become homeowners.
3. Ask your employer
Universities and municipal departments that employ first responders such as police and firefighters frequently make down payment and other home-buying assistance programs available to staffers. Large employers or even smaller companies seeking to lure top-level recruits do something similar: relocation assistance programs.
Check in with human resources to explore whether any such assistance is available — and if you happen to find yourself a hot prospect on the job market, consider trying to negotiate relocation or down payment assistance into your offer package.
4. Tighten your budget
Get gut-level real with yourself about what’s truly important to you. If the answer is buying a home, then it’s time to examine your spending and look for the leakage you can stop up. That’s cash you can redirect to your down payment savings.
If you spend $20 a workday on oatmeal and coffee at breakfast and your takeout lunch, that’s at least $400 per month — almost $5,000 a year you could be saving. And those numbers are not inflated to reflect big-city prices. Nor is the $100-a-month cable bill, the $15 yoga class, or the $2,000 vacation.
Instead, bring your lunch from home, stream TV shows and movies online, and rally your friends to take a workout class together from one of the streaming sites you’re paying for. Cut hotel costs by renting a private room or small apartment on a site such as VRBO or Airbnb.
The key is to click out of money-spending autopilot and to transfer the saved money into a separate down payment savings account.
5. Borrow from yourself
There are situations in which it may make sense to borrow a few thousand dollars from yourself via your 401(k) or IRA.
Some retirement accounts allow you to borrow against or pull out funds, penalty-free, to apply them toward your down payment on a home. Is it advisable for everyone, in every situation, to deplete their 401(k) or IRA to plug that cash into a house? Absolutely not.
But if getting your down payment to the 20% mark by borrowing from your 401(k) gets your mortgage interest rate down and allows you to repay that cash to your own retirement account (versus to your mortgage lender) with interest, you and your financial adviser might agree that this move is right for you.