How to Come Up with a Down Payment for a Home
Don’t let the amount of money you think you have to come up with for a down payment destroy your dream of homeownership. There are ways to get the cash that you might not have thought of. Or you might be eligible for a loan that requires little or no down payment.
The type of mortgage determines the minimum down payment needed. Most mortgage lenders require a cash down payment of 5, 10 or 20 percent of the price of the home.
The Federal Housing Administration (FHA) approves loans of 3.5 percent. The FHA doesn’t actually lend you the money. It insures the loan if you meet the guidelines.
Veterans Administration (VA) loans are designed to help service people and veterans obtain financing at very reasonable rates and offer financing up to 100% of the home’s value. States also offer consumers down payment assistance through a variety of programs.
With less than a 20 percent down payment, homebuyers must pay for private mortgage insurance (PMI) that protects the lender if the buyer cannot pay the mortgage. It is wise to put down as much as possible. It creates equity, helps your credit score, can lower your interest rate and your monthly payment.
Lenders want to see that you have the cash in liquid assets for a down payment prior to approving the loan. They also verify the source of your down payment before closing. Here are some guidelines on how to acquire the cash you need:
The use of a credit card to pay the down payment is not allowed. Using a credit card would change your credit situation and, therefore, the ratio of your debt incurred to your income (DTI).
Save as much as you can toward the down payment and pay off as much debt as possible before applying. Here are some tips to help you save more:
- Add your tax return to your down payment savings.
- Pay off credit cards with the highest interest rate first.
- Ask for a raise. Base your request on your accomplishments, not your housing needs.
- Get a second job. Moonlighting or a part-time job could help you earn the extra money.
- Sell unwanted items. Sell your used furniture or old clothes to add to your savings.
- Look for lost money. Check the National Association of Unclaimed Property Administrators to see if you have any missing money.
Withdraw from your IRA: Tax laws allow you to withdraw up to $10,000 in IRA funds to buy your first home. If you’re married and you both qualify, you could have a potential $20,000 down payment, and the penalty for early withdrawal is waived.
Financial gifts: Tax law allows gifts of several thousand dollars a year to be bestowed without tax consequences to either the giver or recipient. For 2018, the gift-exclusion amount is $15,000. The gift does not have to be from a family member. Ask your Citywide Loan Agent if the down payment for your type of loan can include a gift.
DAP Loan: You may qualify for a low-interest loan to help you cover down payment expenses. A DAP loan is a second mortgage on your home. In most cases, the interest rate on a DAP loan will be the same as the interest rate on your first mortgage. Ask your Citywide loan agent about eligibility requirements.
The Bottom Line
If you think coming up with thousands of dollars seems impossible, it isn’t. There are a lot of non-traditional ways to raise cash for your down payment, if you are willing to think outside of the box.