Few and far between are the mortgage lenders eager to do 100% home financing deals. While there are a few out there (plotting in hidden bunkers and awaiting the next housing boom) you should plan on bringing a lot of money to the table when buying a new home. While a 20% down payment is still the gold standard, you can get away with putting as little at 3% down in some cases. In any case, here are great ideas on where to get that cash.
Some of these ideas may seem odd, but if you're serious about owning a home, you need to be aggressive and creative in getting your hands on as much down payment money as possible. It will make it easier for you to qualify for a loan, give you instant equity and reduce your monthly mortgage payments.
Getting Down Payment Money
If you're reading this article, you're probably thinking about buying a home soon. If so, socking away a few bucks for a couple months is not going to get you enough to cover the expense of a new house. However, if you are building a long-term plan for home ownership, it must involve a good deal of sacrifice starting right now. Flush with cash? Make sure it's safe and liquid.
Your current home equity
If you are planning on selling your current home to buy another, you can use the equity you've built up (your home's selling price minus any mortgages or home loans you have to pay off) to provide the down payment money that you need.
But this is not as sure a thing as it may seem. The timing of your home sale and home purchase can leave you in the lurch. You may not be able to sell your home for the amount you thought, or as soon as you thought you could. In that event, you can consider a bridge loan. This is a popular financing vehicle that allows you to tap the cash in your existing home before you go to closing. This is a short term loan, paid off when your sale is complete. The downside is that you'll pay a premium interest rate and fees. And if your home doesn't sell at all, you'll be paying on multiple home loans at the same time.
Gifts and loans from relatives
Even with his taste for Dom Perignon and caviar, your rich uncle Chadsworth Silverspoon IV can surely afford to help you out. Your parents or other relatives can each give you up to $12,000 tax free as a gift. Don't be afraid to let people know about your plans and ask for help in any amount. Not related to a Silverspoon? Your peeps might be able to lend you the money, if you show them your willingness and ability to repay them.
Bonuses are not just for athletes
If you have a strong negotiating position and feel that you are a top contributor at your job, ask your boss for a bonus. This is superior to asking for a raise in many ways. One, it gets you an immediate cash infusion instead of a small increase with each paycheck. Two, bosses are often more willing to give bonuses than raises because it's a one-time commitment, not a year over year expense.
Tap your retirement and insurance accounts
Most 401(k) plans allow you to borrow against them, tax free and at favorable interest rates. Check your employer's plan and weigh the odds of using this as a source of down payment money. The big drawback is the fact that repayment begins immediately in the form of payroll deductions, so your paycheck will shrink right as you take on a new mortgage.
If you are a first-time home buyer and have an IRA, you can use up to $10,000 of it without incurring the usual 10% early withdrawal penalty. Note that you will still have to pay taxes on the withdrawal itself.
If you've been lucky enough to build up cash value in a whole life insurance policy, you can take out a loan against these funds as well. This will reduce the amount available to your dependents in the case of your death, and you will create a new obligation. The good news is that the interest rates are very low and payments are flexible.
Clean out your closets
You're going to want to pare down your belongings before you move, so why not make money off of all that stuff? You can hold a yard sale or garage sale and kill two birds with one stone. Even better, check out online auction sites like eBay and sell your stuff to anyone in the world. It's a great way to see what your old collectibles, electronics and furniture is worth and get a fair price for your things. Don't be sentimental. You'll have warmer feelings for your new house than that old bomber jacket.
Many local, state and Federal government programs assist home buyers with cash grants for down payment on a new home. Contact your local housing office for a list of any known programs (often run by outside nonprofits)that you may qualify for. Most of these programs are geared to low income and first-time home buyers so if you're not one, don't get your hopes up.
If you're a veteran, you may qualify for a VA Home Loan guarantee. Learn more about this program at www.homeloans.va.gov/lgyfaq.htm.
In weak housing markets, sellers look to get any edge they can in closing a deal for their house. This often includes helping the buyer with the down payment. But sellers are not allowed to give down payment cash to home buyers directly. Sellers can participate in regulated and approved down payment assistance programs that charge the seller a fee and are responsible for facilitating the exchange of funds.
The seller can pay some or all of the closing costs when you purchase a home, but there are guidelines that may limit the amount for your specific transaction. Once again, if you feel that you have leverage, have your buyer's agent raise the topic with the seller.
Other Buyers Guide Topics
Jump back for the index of articles on the basics of buying a home.
Other Web Info
How to Buy a Home With a Low Down Payment from the FCIC website.