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By Tara-Nicholle Nelson | Broker in San Francisco, CA

7 Tips for Coming Up with Down Payment Money

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!

Comments

By Jeremy Drobeck,  Thu Jul 29 2010, 05:29
Something else to mention would be that FHA allows for the money to be borrower if its backed by an asset. For example, if you own your car free & clear you could take out a car loan and use that money for down payment.
By Sydneyg,  Thu Jul 29 2010, 05:48
Great Article. Another thing to consider is asking the owner to finance. This may be a win win for the homeowner and home seeker. We have many articles on our blog on how the owner can use mortgage notes to get more than the asking price for their home.
Please visit the site and add your thoughts.
http://bit.ly/cyNQR4
By Sam Thompson,  Thu Jul 29 2010, 06:51
I am seeing that Gifts are the most popular source of down payment for FHA borrowers. There are some very specific documentation requirements, however, so before the borrower moves any money around, please consult with a knowledgeable loan officer.
By Dawn Mitchell,  Thu Jul 29 2010, 07:44
Saving money and managing money is an important lesson in life. It's no different when it comes to purchasing a home. A downpayment proves to the bank that you are a good risk and you will continue making your mortgage payments, even if you or your spouse lost your job. Don't over extend yourself, a good rule of thumb is you should have money saved to cover yourself for 6 months. The deals will be here for a while, you don't want to be another foreclosure statistic. Be patient, save your money, do your research and don't over extend yourself. Things like granite and stainless steel appliances can always be updated later, it is more important to have a monthly mortgage payment that you are comfortable with and be able to enjoy life!
http://www.boiserealestateDawnMitchell.com
By Roberta Murphy CRS, GRI,  Thu Jul 29 2010, 08:01
We have also had Boomer parents offer mortgage financing for the kids--and bypassing banks completely. Provides above-market interest income for parents and low-cost financing for the related home buyer.
By Kent Calder,  Thu Jul 29 2010, 08:03
Don't forget $0 down rural development loans. Check with your agent.
By David,  Thu Jul 29 2010, 08:35
Never ever borrow against your 401K. Losing your job and having to pay back the loan within 30 days would be an absolute nightmare, not a dream...
By Phoebe,  Thu Jul 29 2010, 08:49
Why, in your article on loans, isn't the VA loan mentioned? The VA, as I understand it is no down and no PMI required.

Richard
By Tara-Nicholle Nelson,  Thu Jul 29 2010, 09:01
Hi, all - thanks for the feedback! Would love to put together a list of low- or no-down options and money saving strategies from Voices members, so keep 'em coming!
By Jen Birmingham,  Thu Jul 29 2010, 09:02
David, an alternative to the "nightmare" of repaying your 401K loan back within 30 days of a job loss is paying a 30% tax penalty on the outstanding loan amount.
By Hank,  Thu Jul 29 2010, 09:30
Borrowing against your IRA or 401k is horrible advice. It should only be used as a last resort.
By Loan Le,  Thu Jul 29 2010, 09:38
Thank you, Trulia, for 7 tips down payment funds.
By Melissa Rettig-Palmer,  Thu Jul 29 2010, 09:39
I agree...No one should ever borrow against their 401K, 403b, or whatever retirement they have. That is bad advice and think about penalty fees and taxes you'll have to pay on that money you withdraw early.
Live in your means and plan for the future!
By Grover Barbaran,  Thu Jul 29 2010, 09:43
City of Sunnyvale, CA provides silent second down payment assistance of up to $50,000 for eligible first-time home buyers. Assistance may be used to purchase market-rate or below-market rate homes in Sunnyvale. The program is available to first-time home buyers who live or work in Sunnyvale and whose incomes do not exceed the maximum for their household size.
I can provide you with more detailed information on this program
By Bill Collins,  Thu Jul 29 2010, 09:45
I disagree about borrowing against your 401K account. I borrowed 40K for a down payment for a condo 2 1/2 years ago. The market was over 14K at the time. Since then it crashed and I am paying myself back with interest and buying much cheaper shares than the ones I sold.
By Stephanie Weiss,  Thu Jul 29 2010, 09:47
I had a client that borrowed against her 401K in 2006, has since lost the home because she couldn't sell it in a short sale and now has a foreclosure on her record and a loan for $43K against her 401K that she MUST repay! That is terrible advice in this day and age! That's the equivalent to taking out a HELOC loan against your home to buy a car, RV or motorcycle! If you can't pay for the toys, you lose the home.
By Tara-Nicholle Nelson,  Thu Jul 29 2010, 09:48
Hi, guys - let's be clear, here, as there seems to be some confusion.

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.
By Jeannie Whitworth,  Thu Jul 29 2010, 09:56
Cutting back on things that you don't need to have, or need to do will start adding up. Do more cooking at home, wash and iron those clothes instead of sending them out. Have movie night at home instead of going out to the movies. There are so many ways of letting that little bit here and little bit there add up. If you are really interested in buying a home there is a way with out leaving you house poor.
By Jolynne Ash, Buyers Agent,  Thu Jul 29 2010, 10:11
Check into local NSP Funds (Neighborhood Stabilization Program). In many Cities and Counties funds of up to $50K are available for homebuyers to use for downpayment, closing costs and repairs. There is a requirement to have some of your own money but it is minimal. The key to this program is that you must buy a foreclosure property that is located in a designated high foreclosure area. In the Portland Oregon Metro area there are entire suburbs that qualify. You must also make less than 120% of the area's median income. Where I live in Portland Oregon that is $85,440. for a household of four and $68,400. for a household of two.

Jolynne Ash, Buyers Agent Portland Oregon http://www.PortlandMyWay.com
By Chris Sanchez,  Thu Jul 29 2010, 10:19
Good article and comments. Thanks! As you can see, opportunities for funding pop up once you start looking for them. If you know what your desired goal is, i.e. "Purchase a $250K home" a mortgage banker or broker can tell you the exact requirements and cash needed to make it happen. It may not happen overnight for everyone, but at least you set a goal and plan.

Cheers!
By John Wafer, REALTOR®,  Thu Jul 29 2010, 10:24
I agree with 1 - 4 and 8. Borrowing from anyone toward a down payment on a house just adds to the stress of repayment. Remember, when you buy a house, you will need furnishings, paint and building supplies, wall and window treatments, and other miscellaneous items. Save more toward your home purchase and you will be free to spend what you need to decorate the way you want without worrying about paying off your mortgage.
By John Wafer, REALTOR®,  Thu Jul 29 2010, 10:27
As above
By Blue1168,  Thu Jul 29 2010, 10:37
I completely agree with Tara about the IRA/401K route. Whether you borrow from your bank or yourself you are borrowing, so if you are going to owe someone "if you lose your job" it would be best if you owed yourself. Moreover we should not assume everyone buying a home will lose it. For those who have planned and are well informed moving money from one asset(401k) to another asset (your own property) is sound advice. Lets not forget that home interest rates are at an all time low, so a home purchase now is a very good idea. The money saved on interest alone will be way over what the retirement plans give you. The key really is planning and not getting in over head from the start.
By Jesse Slade Jr,  Thu Jul 29 2010, 10:39
Its always good to know what your options are. How you exercise them can vary based on your circumstances.
Thanks for the tips.
By Lashonna,  Thu Jul 29 2010, 11:11
Will the government offer any first time homeowner incentives this year or next year?
By Carole & Greg Higgins,  Thu Jul 29 2010, 11:24
This a great article. I think it's important for the first time FHA home buyer to have some of their own money in the deal-it helps them to be committed. There are still ways that they can get to the table with less money down, such as US bank's American Dream Home Loan Program and in Denver there are various non-profits that can help out such as CHAFA ( Colorado Housing And Finance Authority) and CHAC (Colorado Housing Assistance Corp) and I would be surprised if there aren't mirror programs around the country- but I still think it's good for the buyer to plan and save for their purchase adn you present soem excellent ideas to help them with that planning.
By Aaron Mtuanwi,  Thu Jul 29 2010, 12:28
I have got these and will keep running with your info.
Thanks,
By Buckwheat,  Thu Jul 29 2010, 13:04
Save money by asking yourself when on the verge of purchase, " Do I really need this?" Most of the time my answer is no. I used this strategy 40 years ago while attending college and have continued to use it since then. This strategy has helped me save thousands of dollars over the years by not buying impulse purchases or buying an extreme mark down of something I already have. You know the kind; "what a fantastic sale/deal, I already have one but what if I lose it or break it I'll have another to replace it at a great price and I can always use a third pair of jeans. Or " This is a good deal-my wife and I will go through 4 gallons of milk before they spoil." My brother has done this and has three, I kid you not, 3 obsolescent 37" tvs still in boxes because the 4th one he uses is still working 5 years later. He could sale them at a yard sale for maybe $75 if he's lucky but at this point he is keeping them safe in his garage hoping they will become mint condition collectibles still in original boxes for his grandchildren. The rest of his garage is full of Cabbage Patch dolls and other "great deals". I won't even go into the two refrigerators he bought on clearance. "Couldn't pass up that deal, our refrigerator may go out someday." He sees money well spent on great deals, I see mounds of ghost cash ( cash you once had but is now gone spent on a questionable purchase) sitting there that would have been better spent making extra payments on the principal of his home mortgage which would save him thousands in interest on his mortgage over the life of the mortgage. Another downside is the fact that his garage has now become a storage shed for all of his "stuff". Another ghost money purchase is buying something you have no need for now but MIGHT need someday.
Bottom line, buy what you NEED not what you WANT. Thank you for your patience. I didn't mean to go this long.
By Clair Funk,  Thu Jul 29 2010, 15:17
Wow - what a wealth of information this particular blog provided! You all have such great commments. There are alternatives to jumbo loans (that don't exist anymore) and this blog supports that 100%. Great job Tara!
By Ryan,  Thu Jul 29 2010, 15:36
Borrowing against your 401K in 2006-2008 would have been GENIUS... unless you plowed that money into your home.

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.
By David Charles,  Thu Jul 29 2010, 16:07
I like the idea of your city or state helping with down payment
By Dolly,  Thu Jul 29 2010, 19:19
I'd like to learn about the VA helping in purchasing a home - Phoenix, AZ - I'm a veterans widow and I wonder if I am able to still use Vet grant money to pay as downpayment on a home?
By Diana Geremia,  Fri Jul 30 2010, 05:00
Va loans can be great with no downpayment and no PMI. The funding fee can be high but is financed of course so as long as the home appraises for the loan amount all is fine. If the veteran was injured while in service the funding fee may be waved. This is a great loan to utilize.
By Kathy Torline,  Fri Jul 30 2010, 07:27
Great info -- definitely some things I hadn't thought about.
By Otter202b,  Fri Jul 30 2010, 09:39
My husband went on Social security Disability last year . We had to roll over our 401K to a Ira. We are trying to buy a house in Las Vegas. Were having to figure out for Income tax purposes we don't want to take out a lot of the funds as we had plan to buy the home because with the retro check from his retirement and the SSD retro funds we are in the 90,000 tax income . We have never earned more then 48,000 in a year. We have 20,000 put in a saving for the house down payment but we had hope to pay cash for the house or at least 50%. Is there tax deduction for buying a house . I know the first time buyer program is over. We did get preapproved with our Credit Union for 65,000 loan. Is there better programs I can look into Thanks
By Dallas Homes for Sale,  Fri Jul 30 2010, 22:29
Very Helpful Information for everyone, thanks for sharing.
By Dinah Edwards,  Sat Jul 31 2010, 04:43
I would like to know if it would be a good plan to purchace a home using and another home as coladeral,the home that we want to purchase for our son is less than the one we want to use as coladeral,by doing this will we need a down payment if both places stand good,
By Vera,  Mon Aug 2 2010, 07:28
I am a legal resident living in Miami, FL,. My husband was pre approved for a FHA loan, and we are looking to buy a foreclosure home. I would like to know if we can receive any of those government programs to help us to pay for a closing cost or remodeling.
Thank you.
By Spirit Messingham,  Mon Aug 2 2010, 07:58
Good blog, some great tips for First Time Home Buyers in there. Thanks.
By Jordon Wheeler,  Fri Aug 6 2010, 06:52
I also recommend checking into NACA - Neigborhood Assistance Corporation of America - as a source for home buying. They have a 'no closing costs, no down payment' loan program, but the buyer does need to save up for prepaids - taxes and insurance escrow, interest, etc. Great program for buyers looking at homes under $252K. Their website is http://www.naca.com. Here in Georgia their local office is in downtown Decatur and their phone number is 404 377 4545.
By Tean Wong,  Sun Aug 8 2010, 15:32
Great tips! Saving is the key, earning is the must.
By Ryan J. Glass,  Mon Aug 9 2010, 17:42
Great post!
By gypsy,  Tue Aug 17 2010, 13:26
I disagree with the NEVER borrow from your 401K advice. My wife and I did it in 1999, and guess what, equity market crashed, and real estate went up. It was a great decision. If the stock market had continued to go up, it would have been a mistake; or, if the real estate market crashed. Worked perfectly, we paid off loan 5 years early. There are no, THALL SHALL NOT's, just, THALL SHALL USE CAUTION.
By Equity Release,  Tue Jan 4 2011, 15:05
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By Dan Chase,  Tue Jan 4 2011, 21:02
Tara, if you are serious about ways to save money for a down payment read this blog. It is all about how to SAVE for a down payment, It shows how to look at your budget and do without things so your income goes further.

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.

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