Many homeowners will say that saving up for the down payment is the hardest part of the home-buying process. To avoid paying Private Mortgage Insurance (PMI), buyers will need to pay a down payment of at least 20%.
But when you’re talking about homes worth several hundred thousand dollars, not many people have that kind of cash lying around. Luckily, there are ways buyers can get help with their down payment.
There are a number of ways to cut back on your expenses while you save up for your dream home, and every little bit counts. Eating out less, cooking more, and creating a budget (and sticking to it) are small, easy things you can do that could go a long way to save money. And if you can, there are more significant ways to save money. If you are renting an apartment while saving to buy a home, you could downsize and move to a smaller unit to pay less for rent and utilities. If you and your spouse have two cars, you could sell one and share. Think about ways to save and try them out!
The most obvious way to make money to pay for a down payment is by working for it and saving. That might mean asking for a raise at your current job or getting a promotion, but it could also mean getting a second job or a side hustle. But regardless, it could mean more time away from your family. And it can be hard not to spend extra money coming in, especially when something comes up. But if getting a second job is an option for you, it can help you reach your financial goal faster.
If you’re wondering how to raise money for a down payment, one thing you can do that won’t take too much time is sell your belongings. Whether it’s a yard sale or selling items online, there is a market for pre-owned items in good condition. And if you have toys, clothes, furniture, etc… that you don’t want or use anymore, it can be doubly beneficial to make money and also get rid of it all before you move. Just do your research, as some websites take a cut of each sale.
A friend or family member gifting funds for a down payment is also an option if you have someone in your life generous enough to do so. Many lenders will allow gifted money to be used for at least part of the down payment, just be aware that you will have to provide documentation showing that it was a gift and not a loan you have to pay back. But if someone is willing to give you gift money and your lender allows it, this is a pretty great option. And on top of their generosity, the giver can even write the gift off and get a tax break, as long as the gift falls within the IRS’ limit for that year.
If you are not able to afford a down payment with the options mentioned above, there are thousands of Down Payment Assistance Programs all over the country that help low-income and/or first-time buyers. Offered by state/local governments, nonprofits, banks and sometimes even employers, buyers can get low-interest and no-interest loans for down payments and closing costs. There are also grants and loans that don’t have to be paid back, or at least not if you live in the home for a certain amount of time. You could qualify if you meet their income, credit and/or location requirements.
Borrowing from your 401(k) or Roth IRA retirement plan is another option to get money for a down payment. You can borrow up to $50,000 and $10,000, respectively. But nothing is risk-free, and borrowing from your future has consequences. In addition to taking money from your retirement savings, you could face taxes/penalties if money is withdrawn too early. And if you lose or leave your job, you will have to pay the 401(k) loan back or pay a penalty.
Also called an 80-10-10 loan, this lets you put less than 20% down while avoiding PMI. With a piggyback loan, you would have two loans--typically, a mortgage for 80% of the price of the house and a second loan/line of credit for 10% that piggybacks on the first loan. That leaves 10% that you would be responsible for as the down payment. There are piggyback loans where you put down even less, but they are rare. Of course, there are tradeoffs. Piggyback loans tend to have higher interest rates that can increase over the life of the loan, and they may complicate a future refinance.
Though very uncommon, this is a kind of piggyback loan in which the seller carries the second loan instead of the buyer. With the seller as the “lender,” the loan is often shorter-term, has smaller monthly payments, and has a balloon payment with the entire balance due several years after closing. Real estate laws lay the groundwork for these deals, including requiring interest rates to be fixed for five years and increasing no more than 2% a year afterward.
This is a low-cost option that allows you to use your equity in an existing house to help you buy a second. But, of course, you need to have another property for this to even be an option. A lump-sum home equity loan is the most popular way to get money for a down payment, but there are also home equity lines of credit and cash-out refinances.
Lenders don’t generally allow personal loans to be used for a down payment, though there are rare exceptions. And there is a point in time when borrowed money is no longer considered borrowed and becomes yours. That point is typically 60 days, depending on the lender, when the money is considered “seasoned.”
However, keep in mind that a sudden windfall could make your lender suspicious and put your mortgage in jeopardy. Remember, down payments lessen the risk to the lender and prove to them that you are financially stable enough to afford their loan. So they may not like the idea of a borrower paying off their loan with another loan. Having a personal loan may make it harder to get a mortgage and may mean a higher interest rate.
Consider all the above options if you need help with your down payment. But if you still can’t afford a down payment and don’t qualify for down payment assistance, you may need a little more time to save. Buying a home you can’t afford doesn’t benefit anyone, especially not you. So start saving and stick to a budget, and you’ll be in your dream home in no time!