Easy Ways to Save for a Down Payment When Buying a Home
While historic low interest rates and low prices have made it more attractive to purchase a home, the tighter lending restrictions have continued to prevent many consumers from actually making a home purchase. Higher FICO score and income documentation requirements have contributed to the problem, but in many instances it is also the large down payment that is needed to obtain financing that has prevented many prospective home buyers from actually completing the process. The largest obstacle for many home buyers is simply the ability to come up with a down payment. There are several options that may remain open to consumers who have found themselves struggling to come up with a down payment. Such options include existing assets, government programs and even creative personal finance strategies.
Active duty personnel, veterans and some members of the National Guard as well as military reserves may be able to qualify for a zero-down payment mortgage through the U.S. Department of Veterans Affairs. There is a funding fee associated with this program, but the cost of the fee can be rolled right into the mortgage loan. Sellers can pay the closing costs. As a result, veterans can purchase a home with basically no money out of pocket. Additionally, the interest rates on these loans tend to be quite favorable. Prospective borrowers must meet credit and income standards.
There are also state programs that consumers can take advantage of for obtaining down-payment assistance. These programs do vary by state; however, consumers may be able to obtain assistance through subsidized home loans and grants. Consumers must meet income, credit and home sales price requirements to qualify.
FHA is one of the most popular home loan programs. FHA is a federal agency that essentially insures private lenders in the event a borrower defaults on their mortgage loan. Consumers must meet mortgage size and credit requirements to qualify.
Another option for some consumers looking to purchase a home is known as gifting cash. If you do not have a sufficient amount of money available for a down payment, it is a good idea to check with family members to see if they may be able to help. Gifts provided by family members have served as a down payment source for a long time, particularly for first-time home buyers. You will generally need to obtain documentation in writing from the donor stating there is no obligation to pay back the money. You should be aware that cash gifts which exceed $13,000 per person or $26,000 per couple are typically subject to federal taxes.
You might also consider tapping into your IRA. In some instances home buyers may be able to utilize funds from their IRA in order to cover their down payment expenses. Even better, they may not have to worry about the 10% early withdrawal penalty. If you are under the age of 59 ½ and you have not owned a home within the prior two years, you may be able to withdraw up to $10,000 without a penalty from your IRA to contribute towards a home purchase. You can use the cash for closing costs, financing or acquisition.
Your 409(k) is another option worth considering for obtaining down payment cash. In order to use this method you must first be able to demonstrate that you have a severe financial hardship. It is usually better to use other methods first, if possible, before tapping into your retirement savings. If you do not have any other options, this can still be a viable avenue.
Lacking any other resources, you might consider saving up for your down payment. This is a time honored option that can definitely succeed, although it does take time and dedication. The best way to handle this option is to set up a special savings account where you can deposit funds specifically to be used towards your down payment.
Selling existing assets is yet one more option. Over the years everyone tends to accumulate things they no longer need. By going through your belongings you may just find some things that you can part with in order to obtain the cash you need for a down payment.
Finally, a second job has proven to be a successful method for many people trying to come up with the cash for a down payment. Check with your friends and family to find out about possible part-time openings or consider taking on some freelance work if you have marketable skills.