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Your Down Payment: Sources of Cash to Buy Your First Home

Want to buy a home? Nine times out of 10, you’re going to need a down payment.

Only VA loan programs for qualified veterans and active military personnel offer loans with no down payment. And even if your lender doesn’t require it, a down payment is still a good idea, as it it’ll save you tens of thousands in interest.

The amount of required down payment for other types of home loans varies, from as little as 3.5% for FHA loans to as much as 20% or greater for conventional loans. Depending on the type of houses you’re looking at, you may need to be prepared to put down quite a pretty penny. But don’t fret if you have no idea where the money will come from. There are plenty of ways to come up with the down payment for your first house.

Family gifts

Grandparents, parents, in-laws and even siblings may be willing to give you a gift of money in order to help you get that first home. Not all lenders are okay with funding a loan where the down payment is gift money, but many are, as long as the down payment does not have to be repaid to family and you can provide the lender with a “gift letter.” The letter should explain your relationship to the person gifting the money, the amount of the gift, the address of the property the gift is to be used towards and the fact that the money need not be repaid. Make sure that you and your family member who will be making the gift both sign the letter. Best of all, you don’t even have to pay taxes on gifts of up to $13,000 you receive from each relative.

Personal accounts

Not everyone is lucky enough to have a family member willing and able to gift money to be used for a down payment on a house. If you need to come up with the money on your own, like most people do, start by looking into your checking and savings accounts at the bank. You may not think you have much, but the money from both your savings and your spouse’s savings accounts can really add up.

Taxable investments

If you have stocks and bonds that are not a part of a tax-deferred retirement account, you can liquidate them to cover your down payment. This is a viable option, but you’ll want to consider any capital gains taxes you may have to pay when you sell your investments—as well as the opportunity cost of selling your positions rather than staying invested for the long run.

Retirement accounts

If you are a first-time home buyer, you may be able to use some funds from retirement accounts (including IRAs and 401(k)s) for a down payment without incurring the typical early withdrawal penalties that come with taking money out of these accounts.

For example, according to IRS Publication 590, first-time home buyers can withdraw up to $10,000 for the purchase or construction of a home from a traditional IRA or Roth IRA without having to pay the 10% early withdrawal penalty. (If you’re withdrawing from a traditional IRA, you’l still need to pay regular income taxes, too.) Your spouse may also do the same, so if you both have well-funded IRA accounts, you can use up to $20,000 from them towards the down payment.

Some employers will also allow you to borrow money from your 401(k), typically up to half of the balance, in order to buy your first house. The downside to this is that unlike using money from an IRA, borrowing against your 401(k) is like a loan, which does have to be paid back. Additionally, if you were to lose your job after you borrow from your 401(k) you could be required to repay the money that you borrowed quickly, within just a few months, depending on your employer’s policies.

In general, it’s always best to leave your retirement accounts alone. That said, when combined with other funding sources, these tools are often useful in helping first-time home buyers afford a down payment.

Your best bet: Saving!

Often times, you’ll scrap together money from a variety of sources to cover the down payment on your first home. As you do, don’t forget to look for ways to save money for your down payment, too. It’s simple stuff, but ask yourself if you’re spending money on things you don’t really need.

For example, if you rent DVDs regularly, get a free library card and check out DVDs from the library. Most city and county libraries have a selection of new releases on DVD that can be rented for free and for a longer period of time than video stores. If you eat out once a week, check out a few recipe books at the library, head to the farmers market and try a few new recipes. Aim to eat dinner out once a month instead of once a week as you save up for your new home. Try keeping all of your receipts for one week, then looking back and seeing where the money really goes. You may be buying quite a few impulse items like sodas at the drug store and popcorn at the movie theater. By cutting out these items, you can create a savings goal so that putting aside money to be used for a down payment will be easier.

What about you? Where did you get the down payment for your first home?

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About Sarah Davis

Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website RealtorSD.com.

Comments

  1. I collected the down payment money from my first year of income “in the real world” and the associated bonuses that I received. As stated previous by a plethora of different people, make sure you have several thousand extra AFTER closing costs and down payment. There are always extras that you didn’t think about, and all those trips to Lowes and Home Depot add up quickly (kitchen stuff, washer, dryer, fridge, inspections, upgrades, repairs…).
    I’d also recommend NOT using your 401(k) or IRA for your down payment. Doing so is stealing money from your retirement!

  2. good advice! especially the last sentence about not stealing from your 401k or IRA! Funny you should write this article we recently and constantly help people use private banking systems as a source for their down payment. In doing so they don’t have to worry about qualifying and can pay themselves back plus interest and after all is said and done they end up making money!

  3. Stu, I would agree that using a 401k or IRA to find the down payment for a house is not right for everyone. But it can be beneficial, depending on the investment. I actually used $10k from my IRA to buy my first house at 23 and ended up making more – about $110k in a few years thanks to a lot of sweat equity. Did I steal from my retirement account?… Every situation is different.

    • Noemi Gonzalez says:

      Sarah,

      Do you know how long my money has to be in the IRA in order for me to use it for a down payment?

      I have 10, 000.00 in a 401K from my previous employer and want to roll it over to an IRA to be able to use it for a down payment on my first home purchase.

  4. Sarah, how long does cash need to be in an account to be considered seasoned. I had a relative trying to buy a house and had a “Side” cash job and was putting this into her checking account. They did not allow to include this money as part of her down payment. Good information though.

    Thanks,

    Keith

  5. Hi Keith,
    Great question. It’s something to talk to a lender about for more information since every lender has a little bit different requirements. Typically what I’ve seen is that money from something like that would need to be in their account for 2 months for it to be considered. If this was the case yet they were still not including that as a source of income for your relative it may just be the lender’s own requirements. I hope that helps! Thank you for the question!