Where to Find Money for Your Down Payment

Where to Find Money for Your Down Payment

Love Buying a Home Series – Week 5

My step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and all the details in between. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks!

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.

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 (see the fourth article in this series), 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 taken 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.

• Lenders of 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 or purchasing in a USDA eligible area, you can put as little as 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. 

Instead, put down just enough to buy the house and get a monthly payment that works for your budget right now.

Consider how much that you would like in your emergency fund. I recommend 3-6 months of all of your expenses as a good starting point depending on how consistent your income is. For example, if all of your monthly expenses (mortgage payment, credit cards, car payment student loans, etc.) are $5,000 per month, you may want to consider having $15,000 to $30,000 in your emergency fund. Remember, reserves are not always a requirement to obtain financing, but definitely something to consider.

These days, you don’t have to put 20% down to avoid paying monthly Private Mortgage Insurance (PMI). 

There are other ways that you can pay the PMI to keep more money in your bank account when you purchase a home. The amount you actually pay in mortgage insurance is dependent on your credit score, how much you put down, your loan amount, and your loan program. Here are a few ways you can pay it:

1. Monthly Mortgage Insurance: You pay PMI in your monthly payment
2. Single Premium Mortgage Insurance: You pay a one time fee at closing
3. Financed Mortgage Insurance: The PMI gets added to your loan amount
4. Lender Paid Mortgage Insurance: You take on a slightly higher interest rate in exchange for excluding the PMI as a monthly or single fee

There is no one-size-fits all for home financing, so often times we will look at multiple options so you can decide what is the best fit for you!

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. Next week you’ll learn to sort through all the mortgage options out there so stay tuned for that!

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.

If you’re a first-time buyer with a moderate income, you should look into these programs before you consider other options … sometimes discounts on mortgage insurance and/or interest rate may be available too!

Many assistance programs could be a good match for you and your circumstances. Definitely make it a priority if you’re a state, country or city employee since many local jurisdictions want to make it possible for you to work and live in the same community.

Some of these programs are available always, and some are available until funds run out, so please don’t hesitate to contact me to see what may be available to you.

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. Remember 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.

• 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 is 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.

As always, be sure to check with your financial advisor and CPA to understand full tax implications, fees, and penalties before moving money.

Reach Out to Family

You might be reluctant to ask your family, but they can be a great source for your down payment. Your parents might have done the same thing when they bought their first house!

• Gift from Family. Immediate family will often help with home purchases. Gifts up to $15,000 per year per person can be given without worrying about the gift tax. Remember, these figures are based on 2020 and 2021, but they are subject to change every year. 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.

• Tax Refund. Consider changing your withholding exemptions from 1 to zero. Your paycheck will be reduced but you’ll get 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.
• 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. Be sure to keep your receipts.

Getting a mortgage these days, especially for your first home,  is definitely not “one-size-fits-all”.  Email me so we can set up a time to talk through the options and narrow them down to which one or ones are best for you and your particular financial situation and goals.

Next week get all the details in the Five Steps to Obtaining a Mortgage