How to Find Money for Your Down Payment — When You Don’t Have Much Savings
Anything you think is in your way can be removed if you really want to become a homeowner. In fact, you’ll find out that some commonly perceived roadblocks are only myths, and don’t need to delay your dreams anymore. If you are hesitant about moving forward, our new 5-week series is just for you — The 5 Most Common Myths BUSTED About the Best Time to Buy Your First Home.
Myth: I don’t have 10% or 20% to put down; I need to keep saving.
Truth: There are all sorts of responsible ways to find money for your down payment and, depending on your income, there may be loan programs that require as little as 3% down to buy your first home.
For this week, you’ll see that even with lending requirements tightening up, there are ways you can find money for your down payment and it shouldn’t be too daunting for any first-time buyer.
Coming up with a lump sum of money for a down payment can be scary and daunting to many first-time buyers. You definitely don’t want to wipe out your entire savings to purchase a home.
But it doesn’t have to be a roadblock to homeownership!
Once you’ve got your monthly budget all set and know approximately how much home you can really afford), the next step is dealing with your down payment.
Here’s some guidance on where you can find cash for your down payment and also a rundown of some great homebuyer assistance programs that can help reduce the amount you take out of your own pocket.
How Much Down?
How much money you need for a down payment can depend on the type of mortgage you will get for your financing.
- Conventional loans may require 3, 5, 10 or 20% down, depending on your credit and other factors affecting your financial picture.
- FHA loans can require as little as 3.5% down.
- If you are a veteran, you can put 0% down with a VA Home Loan!
- If you are buying in a Rural are, you may be eligible for a USDA loan for 0% down.
However, the amount you put down really depends on YOU. If you’re a first-time buyer, don’t put all of your savings into your house. You may need some of that cash once you’re a homeowner to make the house feel more like home.
Instead, you could put down enough to buy the house and get a monthly payment that works for your budget right now.
These days, you don’t have to put 20% down to avoid paying monthly Private Mortgage Insurance (PMI). Monthly PMI is typically not tax deductible (check with your tax advisor since it depends on your situation), so most people want to avoid it.
A smart strategy for first-time buyers — who don’t have 20% down OR who don’t qualify for a first-time homebuyer program that helps get them to 20% down — is to consider lender paid mortgage insurance. This is where the lender pays your mortgage insurance and you take a slightly higher interest rate. This increase will change your monthly payment but you will not have PMI on your payment or within your closing costs. This can be a great alternative and way to avoid PMI when you don’t have 20% to put down.
Once you narrow down your mortgage options and take into account any homebuyer assistance programs, you’ll have a better idea of how much you’ll actually need for your down payment.
Here’s a rundown of where to find money for your down payment:
Help from Homebuyer Assistance Programs
As a first-time homebuyer, you may qualify for many of the state and local assistance programs out there, many of which could help cover some of your down payment. These could be grants, loans, or forgivable loans that can help with down payment and closing costs.
If you’re a first-time buyer with a moderate income, you should look into these programs before you consider other options for money for your purchase!
For instance, many assistance programs could be a good match for you and your circumstances. Definitely make it a priority if you’re a state, county or city employee since many local jurisdictions want to make it possible for you to work and live in the same community.
We can give you a complete update of current programs out there for first-time buyers. Don’t hesitate to contact us.
Should You Tap into Your Retirement Accounts?
You may have a nest egg of cash that you thought was off limits! These options below may not be the best choice for you, but they are something to consider if funds are needed.
Keep in mind, you will need to follow some set rules to access this money, and should always consult with an advisor to clearly understand any tax implications.
Borrow From Your 401(k) Plan. Check with your employer to see if your 401(k) plan allows for loans. You may be able to borrow the amount of your vested balance. Remember in some cases if you leave or lose your job, you may have to pay back the entire amount in 60 days or sooner. So be sure you understand any tax consequences, penalties and charges as well as repayment terms.
Withdraw Funds From Your IRA. Usually, money in an IRA can’t be withdrawn before age 59 ½ without incurring a 10% penalty. However, you have no worries about a penalty if you’re a first-time buyer or someone who hasn’t owned a principal residence for two years prior to signing a binding sales contract. You can withdraw up to $10,000 penalty-free from an IRA for a down payment if you meet these requirements. If you and your spouse are both first-time buyers, each of you may pull from your retirement accounts, giving you a total of $20,000 in cash. Keep in mind, any withdrawals from a traditional IRA must be reported as income and taxes must be paid. This $10,000 is a lifetime limit — and must be used within 120 days of receiving it.
Withdraw Funds From Roth IRA. The rules are a bit different if your nest egg is in a Roth IRA. The $10,000 you take out for your first home may be a qualified distribution as long as you’ve had your Roth account for five years. This means you can take out your retirement money without penalty, and because Roth earnings are tax-free, you’ll have no IRS bill either.
Reach Out to Friends and Family
You might be reluctant to ask your family, but they can be a great source for your down payment. You will need to decide if this is a gift or a loan. Your parents might have done the same thing when they bought their first house!
Gift from Family Members. Immediate family will often help with home purchases. Documentation is required so you need a letter stating that the money is indeed a gift with no expectation of repayment.
Boost Your Savings
This is one area where you have some control over and should start making an effort as soon as you even begin thinking about buying a home. The earlier you start, the more you can increase your personal savings. We can help you with a budget so you can see how much you may be able to put away per month or per paycheck.
Tax Refund. Consider changing your withholding exemptions from 1 to zero. Your paycheck will be reduced but that may mean getting a bigger check at tax time to use toward your down payment. That way you won’t use the money up during the year and will have a big chunk at the end. Be sure to check with your accountant or CPA about how this will change your financial picture come tax time.
Deposit $$ in Bank Regularly. You’ve probably heard this before, but it does work: Get into the habit of putting the same amount of money into your savings after every paycheck. If you get paid every two weeks and save $200 from every paycheck, you will have saved more than $5,200 after 12 months. Not bad!
Sell Stuff on eBay or Craig’s List. Everyone has unwanted items that take up space. Consider selling these items and put that money toward your down payment. Keep in mind all deposits within 2 months of the purchase do need to be verified and sourced, so be sure to keep track of all of the paperwork.
As you can see, there are several options to consider when looking for down-payment money as a first-time buyer. Don’t consider it an immediate roadblock to homeownership, and we are here to help you find a way!
Next week, we’ll bust the next home-buying myth — Don’t Be Derailed By Your Credit Score. You’ll learn about ways to improve your score and what to avoid so you don’t lower it.
I'm Jordan and I love helping first time home buyers make their first home more affordable and stress-free! It all starts with your personal budget and how much you can comfortably afford. Let me know how I can help you make your real estate dreams come true.
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