Before you can consider purchasing your dream home, or any house for that matter, you’ll need to take the all-important step of learning to save for the requisite down payment, unless of course you are just rolling in spare cash. You’ll need to consider this step as your highest priority, or you may find yourself disappointed, perhaps even embarrassed once you end up going through all of the paperwork and red tape only to find out that your mortgage loan application is denied due to insufficient funds.
To start, it is good to get an estimate of the amount you can afford to spend on a house. When you’ve decided on your house budget, you’ll need to calculate what 20% of this budget amounts to, then set that as your down payment goal. This percentage is a safe number for both the buyer and the lender. Lenders are not interested in losing money and typically feel that buyers who cough up a strong 20% amount are less likely to abandon their payment responsibilities. The truth is, the larger the down payment you provide, the easier it will be for you to get a mortgage loan approval, since mortgage lenders are more comfortable working with higher down payments.
If your down payment does come in under 20% of the house price, the mortgage company may require you to purchase Private Mortgage Insurance, also known as PMI, which can add hundreds or thousands of dollars to your annual expenses. The insurance protects mortgage lenders in the event you default on your loan. The cost of the insurance is dependent on the purchase price of the home and usually remains in effect until you have achieved 20% equity in your new home. In many cases, the mortgage company will require an appraisal to be completed — and billed to you — before the PMI insurance can be lifted.
If you find yourself ready to move forward with a home purchase but would like to know how to raise your down payment to 20% or more, then here are some ways to do it.
10 Ways To Secure the Down Payment For A New House
#1 Consider purchasing a less expensive home that will fit your budget.
Don’t stretch — just don’t do it. By getting a smaller house, you’ll obviously have a smaller down payment. Set your expectations to match your pocketbook and go for a home that you can comfortably afford. When determining the size of your home budget, you’ll also need to take into account other costs above and beyond this outlay. You’ll also need to consider additional expenses such as moving expenses, new furniture, repairs, maintenance costs, insurance and possible home improvements you may need on the fly. So when you’re planning for a home purchase, do your analysis carefully. You can’t err by being conservative in your estimates: settle on a home that doesn’t stretch your finances too thinly.
#2 Research down payment assistant programs.
There are companies who specialize in down payment programs that can help you finance your down payment. These programs generally require excellent credit and potentially high fees and interest rates. There are also programs that vary by state, locality and community, which offer grants and loans to people who need down payment help. Some programs that provide financial assistance for would be homeowners: Fannie Mae and Freddie Mac.
#3 Ask about seller’s assistance.
Deal with the seller. Occasionally owners will be willing to work with a buyer and offer a second mortgage in order to sell the property. However, keep your eyes open for red flags, should a seller be too accommodating with financing. This may be the case because the property has issues of disrepair or major problems that are never discussed. Always get a thorough inspection by a professional before agreeing to anything.
#4 Don’t give up on savings.
Wait until you’ve saved enough. The traditional way to get a down payment scrounged up is by doing some good old-fashioned saving. Save your money on a regular basis, and practice some discipline and self-control. It’s not uncommon for people to save religiously over the course of a few years before they get the amount they need for a house purchase. To free up some money for savings, why not rework your budget and cut out unnecessary spending?
#5 Try not to raid your retirement plan.
No matter what advice you’ve heard, think twice before tapping into your retirement funds — whether it be from a 401K or an IRA. Sure, you are allowed to take loans out against your retirement money, but this can be a dangerous game you’re playing. If you do end up borrowing against your retirement accounts, you’ll need to pay attention to the repayment schedule or possibly face income tax and penalties on the amount withdrawn.
#6 Ask your family or friends for a loan.
Got relatives or buddies with deep pockets? They may just be willing to finance your down payment, especially if they trust you well. By cutting a deal with people you know, you could definitely work out much better terms than by going through the standard lending channels. But when you apply for a mortgage, these other loans will also be taken into consideration by lending agents when determining your eligibility to qualify for a home loan.
#7 Look to social lending sites like Lending Club.
You may be able to secure one or more loans through peer-to-peer lending sites like Lending Club. Such loans may be available for better rates (depending on your credit score and history) and may be easier to get, compared with loans from traditional sources like banks and other lending institutions. Interested in this route? Then our Lending Club review can provide you with more details.
#8 Request monetary gifts.
Cash may not be the most traditional form of gift, but it certainly can be the most practical. By receiving monetary gifts during big life events such as a wedding or graduation, you may just pool enough for a down payment down the line. Note that gifts are tax free up to $12,000 per giver and per recipient. So technically, your parents would be able to gift you and your spouse a total of $48,000 without incurring tax consequences.
#9 Share a house.
Sharing living space is a common set up in certain cultures, and it certainly is something becoming much more acceptable and popular in the age of expensive real estate. If you can pool your down payment resources with relatives, friends and even tenants whom you’re willing to live with, then this strategy may just be the ticket to score you the house you hope to have.
#10 Offer to trade home equity for cash.
Another novel idea to propel you towards home ownership involves getting others to invest and share the equity of the home you live in. This was how I actually ended up owning my first home: my parents provided the down payment for my first house while I paid for the mortgage and repairs as its primary resident. When we sold the house, we all shared the profits and it was a nice win-win situation. This is a great situation on paper, but in reality, deals and relationships like these can quickly become complicated. To avoid any financial disagreements, make sure that your arrangement is formalized.
Some parting words: buying a home is probably the most involved and costly process you will go through in your lifetime. Take each step very seriously and do not be in a hurry to sign anything without first taking the proper steps. If you anticipate buying a house, make sure you have a solid plan and have all your ducks in a row. 🙂
Image Credit: Mountaintop Loan Services
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