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.
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.
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.
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.
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?