To get into a new home, it’s likely that you will need to come up with a down payment. There are no more 100% mortgage loans from what I hear.
Having a down payment is wise anyway. If your home value drops, or you end up needing to move quickly, then you won’t be stuck in a negative equity situation. You’re options will be greater.
The wife and I would like to be in a new home within a year. We have some other financial hurdles to jump through first, but having a nice down payment is also on our list of to do’s.
So where do you turn to find this money? There’s a whole spectrum of methods to choose from, each with their pros and cons.
As a baseline, I think it’s wise to have the following in place before laying a bunch of cash down on a home down payment: emergency fund established, bad consumer debt out of the way, and maxing out your retirement accounts. So once you have that in place, where do you turn to for the down payment money? Here are some thoughts on that:
Financial assistance for a down payment.
At one point you could get help from the seller to afford your down payment (and you may still be able to do this on the State level, I’m not sure). However, after H.R. 3221, the Housing and Economic Recovery Act of 2008 was signed, seller-funded down payment assistance for FHA loans got prohibited.
This was obviously a good move, as before this time, we likely had too many people in homes they couldn’t afford. Let’s face it, a down payment is a good signal that you are ready to buy a home. It says you can live within your means.
Borrowing the down payment from other sources.
I’m not even sure if you can do a hybrid loan anymore. But I know back when I bought my first house, we could have done a 80/20 loan, where we have an initial loan on 80% of the house, and a second loan (at a much higher rate) to meet the other 20%. You can also borrow from your 401K.
But that’s not really a good idea as you may miss out on gains. Plus, that money is for retirement, not a home. The same rule applies to an emergency fund. Don’t tap it for a down payment, or you’ll end up in a risky financial position.
Receiving a gift of cash for the down payment.
If you have friends or family who want to assist you in your home ownership quest, then by all means take them up on it. For the lender to see this money as truly a gift, they will need proof that the money isn’t a loan.
A gift letter, to include all the details about the money given, will likely be required for you to proceed with the loan.
The old fashioned method.
The best choice that I see is to build up cash with a combination of reducing debt and expenses, as well, as increasing income. This slow and steady method will leave you with a solid financial situation going into your new home. This may take some time and effort, but it should produce the best result for the long haul.
The steps are simple: pick a total down payment number, divide that by how many months you want to spend getting there, and then start saving that much each month. As with any savings goal, I strongly suggest making it automatic and keeping it separate.
What about you? What are your tips for finding money for a down payment on a new home?