Down payment: The mere utterances of the term strikes dread in the hearts of many a homebuyer-to-be. Coming up with a down payment often seems like an obstacle that must be overcome, as it is the biggest test of our ability to save money most of us will ever face and it’s a test that stands between us and our ability to become a homeowner.
I think it’s time to flip the script on how we think about down payments. What if we looked at them less as an obstacle, and more as an opportunity? Saving and collecting a down payment takes time, discipline and financial planning. It forces us into creating and practicing sound money management skills and habits, and into making clear choices about what’s important to us – things that will stand us in good stead throughout our tenure as home owners. To boot, the more money we have to put down, the more choice we have in terms of our purchase price range and the more control we have over our monthly payment.
All that said, down payments can be take years to save for, and some buyers are concerned they might miss a good market opportunity by continuing to wait. If you count yourself in that number, here are a handful of less-well known sources for boosting your down payment stockpile:
1. Your City. Most of us remember the days of the zero-down loan, the federal home buyer tax credit era, and even have memories of when we could use tax credit funds toward our down payment and closing cost requirements. The keyword here is ‘memories’ – those days are long gone, as are the times when there were nationwide programs that allowed a home’s seller to ‘gift’ the buyer a down payment from the overall purchase price of the home.
Where have all the down payment assistance programs gone? Local, that’s where.
The best programs of this sort are now largely operated by local governments, primarily cities and counties. As such, the rules vary widely. Some are exclusively operated for buyers with low or moderate incomes. Others are dedicated to helping first-time home buyers, usually defined as someone who hasn’t owned a home in the past 3 years. Many of these programs have a limited pool of funds that may run out over the course of the fiscal or calendar year, and almost all of them require buyers to jump some major hoops in terms of:
- bringing their own funds to the table
- picking a home that meets certain minimum condition criteria and/or
- completing a course of homeowner education classes
in order to qualify for the funds. Some state and local programs in areas were particularly hard hit by the recession also offer big-time bonuses for buyers who agree to purchase a bank-owned home or a property in a designated economic recovery zone.
To find these programs, just run a series of Google searches to find your city, county and state websites. Most will have a link for Residents, Housing, Homebuyer Assistance or some similar category of resources. And here’s a hint – make sure you’re on a site that ends in .gov – scammers posing as governmental agencies abound. Also, talk with your trusted, local real estate agent or mortgage broker; they often know the ins and outs of the local programs that can help a home buyer out.
2. Your Parents, Family and Friends. Many more home buyers than you might think get by with a little help from their friends (and relatives). Most mortgage programs will allow for some portion of your down payment to come in the form of ‘gift money,’ which is exactly what it sounds like: money someone gives you to help you buy a home. Check in with your mortgage pro about how much of your down payment needs you can satisfy with gift money – guidelines varies widely based on how much of your own cash you have to put down and what loan programs you’re applying for.
While gift money sounds great, it’s far from a panacea to the problem of coming up with a down payment. Taking gift money from a relative may create relationship issues or come with emotional strings attached, something you should consider and evaluate before you even have conversations about it with your potential benefactors.
And gift money generally also comes with lender strings attached, as well. Namely, lenders almost always require that gift money be contributed along with a gift letter that states that the giver is a relative and that the money is a gift, not a loan. The lender may also require to see a bank account statement from the giver showing that the money was theirs to give – just to be sure they didn’t go out and get some sort of loan that they expect you to help them repay.
Most insiders think of gift money as large gifts exclusively allowable in the context of a familial relationship, but at least one program I know of allows any general well-wisher to contribute any amount to your cause, whether or not they are a relative. The FHA Bridal Registry program allows couples to open a down payment registry account with their lender, and to deposit checks into that account from anyone who wants to give any amount to help them become home owners. Talk to your FHA mortgage broker for more information on how to open such a registry account.
3. Your Employer. Universities and the municipal agencies that employ first responders like police and fire personnel frequently make available down payment and other home buying assistance programs to their staffers. So do some large employers or even smaller companies who are seeking to lure top-level recruits, in the form of relocation assistance programs. Check in with your employers’ Human Resource division to explore whether any such assistance is available – and if you happen to find yourself a hot prospect on the job market, consider trying to negotiate relocation or down payment assistance into your offer package.
4. Your Income. This is not about cutting out a cup of coffee here or there. Euro-style austerity measures are just too hard to keep up for the months or years it can take to save up a down payment. Rather, the idea is to get gut-level real with yourself about what’s really important to you. And if the answer is buying a home, then it’s time to go through your spending with a fine tooth comb and look for the leakage you can stop up – cash you can redirect to your down payment savings.
If you spend $20 a workday on oatmeal and coffee at breakfast and your takeout lunch, that’s $400 per month – almost $5000 a year, you can save by simply bringing these things from home (not to mention the health and other benefits you’ll gain). And those numbers are not inflated, if you work in a big city. (Nor is the $100/month cable bill, the $15 yoga class or the $2,000 vacation.)
Fact is, you can have much of the enjoyment of these things for much, much less than you’re used to spending – at least while you’re in down payment-saving mode. Stream TV shows and movies online at Netflix, Hulu or Amazon – you can also find great workout videos on some of these channels for 10 percent of what you’d pay to go to a class! Bring the staycation back, or cut hotel costs by renting a private room or small apartment on a site like VRBO or Airbnb (you might be surprised at how nice the experience is if you stick with the vacation rentals that have rave reviews – I certainly was.)
Redirecting the dollars you would normally spend – whether intentionally or on autopilot – for some of these big-ticket items back into your down payment savings account is like pressing fast forward on your home buying timeline. The key is to click out of money-spending autopilot and to transfer the saved money, asap, into a separate down payment savings account – ideally one that is online, so you have to think hard and wait a few days before pulling money out.
5. Your Assets. Some retirement accounts allow you to borrow against or pull out funds, penalty-free, to apply them toward your down payment on a home. Is it advisable for everyone, in every situation to deplete their 401K or IRA to plug that cash into a house? Absolutely not. But there are situations in which it may make sense to get your down payment up to 20%, say, by borrowing a few thousand dollars from yourself.
If getting your down payment to the 20 percent mark by borrowing from your 401K gets your mortgage interest rate down and allows you to repay that cash to your own retirement account (vs. to your mortgage lender) with interest, you and your financial advisor might agree that this move is the right move for you. Or not – this is a highly personal decision that must be made strategically, but some home buyers should at least explore whether their retirement accounts are a sensible source of some portion of their down payment funds.
And these aren’t the only assets that can help fund your down payment. I know a young family who has given themselves a complete financial makeover over the last few years by getting rid of unnecessary belongings and selling them at flea markets, yard sales and online. Don’t underestimate what reselling your stuff can yield; my own Mom has had a few four-figure yard sales over the years!
Do you have ‘stuff’ you don’t need or use that someone else would love? Consider liquidating it online or taking it to a consignment store, and using the cash to fluff your down payment savings. Side benefit: you’ll have less to move when you’re ready to move into your new home!