7 Tips for Coming Up with Down Payment Money
Posted under: Home Buying
|
July 27, 2010 2:59 PM |
20,022 views |
45 comments
Zero
down loans are (almost) entirely a thing of the past. While many
wanna-be buyers are tucking their down payment pennies away, many of
these folks feel that they’re missing out on deals in the meantime!
Here are my top 7 tips for coming up with those critical down payment funds:
Know how much you need to save. We all know that to reach a goal, you have to set a clear target. So, first things first: figure out exactly how much of a down payment you actually need. If you have a credit score of at least 620, you may be able to qualify for an FHA loan that only requires a 3.5% down payment. (For a $200,000 house, that’s $7,000.) Check in with your agent and mortgage broker regarding (a) whether you qualify for an FHA loan and (b) whether you’ll be able to find a property that works for you and for the FHA within the realm of what’s affordable for you.
It’s true – the conservative lending guidelines on FHA loans will limit how much you can spend, and require you to pay monthly private mortgage insurance (PMI), if you put less than 20% down. But PMI is tax deductible and eventually goes away. So what this really means is that you’ll more than likely end up with a mortgage payment that you can easily afford to pay for a long time to come. And it might be less house than you might be able to buy with a higher-down payment, less conservative loan, but less is more, people. Less is more (especially when it comes to mortgage payments!).
Also, while no-down-payment loans are almost extinct, there is a little tiny exception for borrowers employed in a certain set of professions: doctors, lawyers, dentists and C-suite executives of Fortune 500 companies are all potentially eligible for zero down professional loans offered by a couple of small, private banks. These loans do have the basic credit and income requirements, but they require ZERO down payment, because these professionals are perceived as posing a very low risk of foreclosure. In some cases, pros can qualify for up to $1 million with no down payment!
Save your dough in a high-interest online savings account. Regular bank savings accounts are paying right around .10% interest right now. Ally and SmartyPig are paying somewhere between 2 and 3 percent. Every little bit helps, right?
Sell your junk. eBay, anyone? Not only does selling the stuff you no longer need or use generate cash to put into the down payment kitty, it has the side effect of feeling almost like preparation for moving. Clear out your clutter, make room for your new life as a homeowner, and make a few bucks at the same time. That’s what I call a #WIN.
Get a side gig – Blogging, weekend table-waiting, baking, dog-walking – it’s not overkill to get a second job or start a small side business to help you either pay down your debt or save up toward your down payment.
Borrow it from your city or state. The federal homebuyer tax credit is history, but many state and local governments still offer incentives for homebuyers in the form of down payment assistance programs. Most often, these are second mortgages with very low or no payments for 5, 10 or even 30 years (in Oakland, California, for example, the down payment loan doesn’t have to be repaid for 30 years or until you sell or move out). And many will help not just low-income buyers, but also those with moderate incomes, or anyone buying their first home!
Google <your city> <your state> and <down payment assistance> to see what your local government has on offer, and what it takes to qualify.
Borrow it from yourself! If you have a 401K or Roth IRA account and some years to go before retirement, you might be able to tap into it or even borrow against your own funds for your down payment. Currently, you can take up to $10,000 out of your Traditional IRA with no penalty to put toward the purchase of your first home, but you will be taxed. You can take as much as you want out of your Roth IRA contributions with no penalty or taxes, though, and as much as $10K from your earnings penalty-free for your down payment. The rules get a little tricky, here, so definitely check in with your tax and financial advisors.
And while you can’t similarly draw from your 401K, many retirement and pension plans will allow you to borrow the money against your funds, then repay it to yourself – at interest. Hmmmm, pay your lender back with interest, or pay interest to yourself – choose you! But first, get some advice from your CPA or financial planner.
Get the gift that keeps on giving. Cash gifts from relatives are seen by many lenders as a legitimate resource for down payment funds. There are guidelines, though - some lenders require that you put your own money on top of a small cash gift (less than 5% of the purchase price); but will let you use gift money exclusively if the gift is 20% of the home's price or more. Also, most lenders require a "gift letter" documenting that the giver is your relative and is not expecting you to pay the money back.
Check in with your mortgage broker for a briefing on gift-money guidelines.
If it seem like a "gift" is a hard thing to come up with - don't dismiss the concept too soon. I know more than a few now-homeowners who had no clue where their down payment money would come from until they were reminded about gift money as a strategy, then cashed in long-ignored offers of help from parents, aunts and uncles.
Psst - you should follow Trulia and Tara on Facebook, too!
Here are my top 7 tips for coming up with those critical down payment funds:
Know how much you need to save. We all know that to reach a goal, you have to set a clear target. So, first things first: figure out exactly how much of a down payment you actually need. If you have a credit score of at least 620, you may be able to qualify for an FHA loan that only requires a 3.5% down payment. (For a $200,000 house, that’s $7,000.) Check in with your agent and mortgage broker regarding (a) whether you qualify for an FHA loan and (b) whether you’ll be able to find a property that works for you and for the FHA within the realm of what’s affordable for you.
It’s true – the conservative lending guidelines on FHA loans will limit how much you can spend, and require you to pay monthly private mortgage insurance (PMI), if you put less than 20% down. But PMI is tax deductible and eventually goes away. So what this really means is that you’ll more than likely end up with a mortgage payment that you can easily afford to pay for a long time to come. And it might be less house than you might be able to buy with a higher-down payment, less conservative loan, but less is more, people. Less is more (especially when it comes to mortgage payments!).
Also, while no-down-payment loans are almost extinct, there is a little tiny exception for borrowers employed in a certain set of professions: doctors, lawyers, dentists and C-suite executives of Fortune 500 companies are all potentially eligible for zero down professional loans offered by a couple of small, private banks. These loans do have the basic credit and income requirements, but they require ZERO down payment, because these professionals are perceived as posing a very low risk of foreclosure. In some cases, pros can qualify for up to $1 million with no down payment!
Save your dough in a high-interest online savings account. Regular bank savings accounts are paying right around .10% interest right now. Ally and SmartyPig are paying somewhere between 2 and 3 percent. Every little bit helps, right?
Sell your junk. eBay, anyone? Not only does selling the stuff you no longer need or use generate cash to put into the down payment kitty, it has the side effect of feeling almost like preparation for moving. Clear out your clutter, make room for your new life as a homeowner, and make a few bucks at the same time. That’s what I call a #WIN.
Get a side gig – Blogging, weekend table-waiting, baking, dog-walking – it’s not overkill to get a second job or start a small side business to help you either pay down your debt or save up toward your down payment.
Borrow it from your city or state. The federal homebuyer tax credit is history, but many state and local governments still offer incentives for homebuyers in the form of down payment assistance programs. Most often, these are second mortgages with very low or no payments for 5, 10 or even 30 years (in Oakland, California, for example, the down payment loan doesn’t have to be repaid for 30 years or until you sell or move out). And many will help not just low-income buyers, but also those with moderate incomes, or anyone buying their first home!
Google <your city> <your state> and <down payment assistance> to see what your local government has on offer, and what it takes to qualify.
Borrow it from yourself! If you have a 401K or Roth IRA account and some years to go before retirement, you might be able to tap into it or even borrow against your own funds for your down payment. Currently, you can take up to $10,000 out of your Traditional IRA with no penalty to put toward the purchase of your first home, but you will be taxed. You can take as much as you want out of your Roth IRA contributions with no penalty or taxes, though, and as much as $10K from your earnings penalty-free for your down payment. The rules get a little tricky, here, so definitely check in with your tax and financial advisors.
And while you can’t similarly draw from your 401K, many retirement and pension plans will allow you to borrow the money against your funds, then repay it to yourself – at interest. Hmmmm, pay your lender back with interest, or pay interest to yourself – choose you! But first, get some advice from your CPA or financial planner.
Get the gift that keeps on giving. Cash gifts from relatives are seen by many lenders as a legitimate resource for down payment funds. There are guidelines, though - some lenders require that you put your own money on top of a small cash gift (less than 5% of the purchase price); but will let you use gift money exclusively if the gift is 20% of the home's price or more. Also, most lenders require a "gift letter" documenting that the giver is your relative and is not expecting you to pay the money back.
Check in with your mortgage broker for a briefing on gift-money guidelines.
If it seem like a "gift" is a hard thing to come up with - don't dismiss the concept too soon. I know more than a few now-homeowners who had no clue where their down payment money would come from until they were reminded about gift money as a strategy, then cashed in long-ignored offers of help from parents, aunts and uncles.
Psst - you should follow Trulia and Tara on Facebook, too!
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http://www.boiserealestateDawnMitchell.com
Richard
Live in your means and plan for the future!
I can provide you with more detailed information on this program
Both Traditional and Roth IRAs allow some withdrawals WITH NO PENALTY for your down payment on your first home, within guidelines - and the guidelines are important, so check in with your tax pro and financial planner. Additionally, there's no penalty for borrowing against your 401K, because you're not actually withdrawing funds, but borrowing against it. All you lose is your earnings on the amount you borrow from the time you take the loan against your 401K to the time you repay it.
It's important for buyers to know all their options so they can plan - if your options are to borrow against your 401K to get to 20% down or to make a lower down payment and pay PMI, it may be to your advantage to go the 401K route.
Buyers who are planning ahead may want to strategically place funds in a Roth IRA with the plan of using it as a source of down payment money - so it's not necessarily stealing from your retirement funds, but more using the fund as an automatic savings vehicle for your down payment money.
Check in with your financial advisor and/or CPA before you make any of these moves, to make sure you understand the facts underlying your decision.
Jolynne Ash, Buyers Agent Portland Oregon http://www.PortlandMyWay.com
Cheers!
Thanks for the tips.
Thanks,
Bottom line, buy what you NEED not what you WANT. Thank you for your patience. I didn't mean to go this long.
How many people lost money between 2008 and now in their 401K.. EVERYONE... if they bought ANYTHING besides a house with that money then they are most likely far better off. Because had they left it to rot in their 401k.. it'd be cut in half.
Thank you.
http://www.trulia.com/blog/dan_chase/2010/01/how_do_i_get_a_down_payment_to_buy_a_house_the_ideas_below_worked_well_for_me_they_could_help_you_also
There is no fluff there. Borrowing money is not mentioned. Borrowing is not coming up with anything except for more debt. Savings added from interest are ignored. If you got a high interest rate now you might get $1 or $2 per $1,000 a month in interest. When a down payment is only 3.5% the interest from a bank account is negligible. Not drinking 5 sodas a month would save more money.
Besides, you forgot some costs. When you buy a house you need 3.5% down for a FHA loan. That could increase. But you need EXTRA cash for closing costs and even more to cover some emergency spending that could come up. If you buy a house and end up without enough money to replace your car starter and something happens that demands money what will you do?
Having enough money for a down payment is a lot different than having money for buying a house. More needs to be saved for all costs and emergencies that could arise.