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Feb 2018

5 Unique Down Payment Sources to Consider

When it comes to buying a house, one of the biggest challenges you may face is sourcing your down payment. Unless you qualify for a loan program that offers a no down payment option, you might be required to put a percentage of the purchase price down to close on your new home. This is likely one of the largest cash transactions you’ll make, and you may be unsure of how you’ll pull it off. Fortunately, there are some unique ways to make it work that you probably haven’t yet considered.

What is a down payment?

A down payment is a cash payment you’ll make on closing day that goes toward the total purchase price of your new home.

The more you put down up front, the less you’ll have to borrow – meaning you could possibly end up with a lower monthly mortgage payment.

While you commonly hear about a 20% down payment for conventional loans, there are some great loan programs out there, like the FHA loan, which allows you to put as little as 3.5% down. On a $200,000 home, that would be a $7,000 down payment – which is still a pretty penny! Read on for some creative ways to source the down payment you need.

1. Gift funds

If you happen to have an extra generous family, they may offer to provide you with gift money to put toward your down payment. Most mortgage programs allow this type of “gift” but the amount allowed and who is considered an acceptable donor varies, so it’s important to work closely with your mortgage lender when going this route. There are also some strings attached.

The gift must be accompanied by a letter stating that the money is a gift and not a loan, and in some cases, a copy of the giver’s bank statement is required to show that they had the money to give.

In recent years, crowdfunding has been a popular way to raise money for charities, businesses, products and more – but would you consider funding your down payment using this method? While it may not be for everyone, this unique strategy can certainly pay off! Keep in mind that any gifted amount requires a letter stating the money is a gift and repayment isn’t required.

2. Your budget

The options listed above require a bit of legwork in order to get the down payment assistance you need. However, there’s another option that you may not have considered – seeking out additional income within your budget. No, it doesn’t mean you need to go get a second job – simply taking a fine-tooth comb to your monthly expenses and determining where you can make cuts will add up quickly. For example:

  • Cut the cable strings and subscribe to Netflix or Hulu.

  • Prep your lunch at home instead of getting takeout.

  • Brew coffee at home rather than hitting the coffee shop on your way to work.

You can also start planning your budgeting better. There are many budgeting “rules” and tips you can take advantage of — like the 50/20/30 budget rule that helps you plan on saving 20% for a down payment and other possible expenses, 50% going to recurring debts like your rent, car payments, etc., and 30% to enjoy living a little, spending it on travel and food! Another savings budgeting rule is the Saving While Spending rule, where for every dollar you spend on going out for dinner, or the movies, or coffee run, you match the same amount in your savings account.

3. Local programs

Though federal down payment assistance programs are few and far between, many local governments now offer funding programs to help homebuyers achieve the dream of homeownership. Primarily geared toward first-time homeowners or those with low to moderate incomes, these programs come with certain requirements like attending homeowner education classes or buying a home that meets specific criteria. Since these government programs have limited annual funds, the earlier you’re able to tap into the resource, the better your odds of getting financial assistance.

4. Retirement assets

This may not be the most ideal option, but in some instances, lending money from your retirement savings can be beneficial when you need to come up with a down payment. For example, if borrowing from your 401k means you can put a full 20% down payment on a conventional home loan – thus, potentially lowing your monthly payment and foregoing private mortgage insurance – you can use the extra savings each month to repay the cash to your retirement account.

Keep in mind, there are tax penalties for withdrawing funds early and the money must be paid back.

Because of the complexity of this option, you’ll want to discuss the pros and cons with your financial adviser.

5. Your employer

Many government agencies and educational institutions offer down payment and home buying assistance programs to their employees. Additionally, more companies are offering relocation assistance programs to lure top-level recruits. If you’re in the market for a new job in a different city, be sure to inquire with the company’s human resources department to see if these benefits would be available to you. When my husband took a new job in a city 900 miles from where we lived at the time, his new company offered paid relocation that not only covered the closing costs of selling our old home but also offered significant home buying assistance in our new city as well. Making small changes can lead to significant savings each month – and all of that extra money can go directly toward a down payment on your new home. While coming up with a down payment may seem intimidating, it doesn’t have to be! With a little research and a dose of diligence, you’ll be on your way to owning a home in no time.