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Whether you're ready to move up or know someone who is getting ready to buy their first home, you (and they) should be aware that the days of 100% financing are long gone. The minimum requirement for a down payment in the current market is likely around five percent (some circumstances may qualify for a bit less). Before you begin to feel daunted, here are a few ways you can come up with the necessary funds:
Increase your IRS deduction. Adjust your income tax withholding to take out more than what you will actually owe. This is a sure-fire way to save, as there is no way for you to spend the money accidentally. However, this is also giving the government the opportunity to earn interest on your savings, rather than earning that interest yourself.
Lock your savings into a CD, The longer the amount of time you lock money into a CD, the higher the interest rate you will receive. Choose your CD wisely. If you take the money out before the deadline, you forfeit the interest.
Look for homebuyer assistance programs. Check out your local government agencies to see what types of programs they offer for first time homebuyers. If you are a veteran, check with the Veterans Administration to see what they offer as well.
Research ways to save extra money. Instead of eating out every day, try packing your lunch. Make coffee at home instead of buying it at the coffee shop. Comparison-shop insurance rates to see if you can lower your expenditures there. Cut back on your cable bills by dropping the premium movie channels. Of course, the key to all of this is then taking the money you normally would have spent and socking it away in some type of saving account.
Borrow from your 401(k). Some 401(k) plans allow you to borrow from your savings. You can talk to your plan’s administrator about the rules that come with it. Keep in mind you will have to pay interest on your money, but at least you are paying it back to yourself. There are significant penalties if you do not pay it back.
Get a down payment gift. Parents, grandparents or other relatives can gift you a down payment tax-free. Talk to your accountant about this year’s rules. Your relatives will need to supply a letter stating that it is indeed a gift and not a loan. Speaking of loans however, your relatives can also loan you the money for a down payment. Keep in mind though; the lender will count this as part of your debt.
Your mortgage professional can help you come up with other ideas for ways to raise a down payment, so do not hesitate to ask for advice.
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