Taking the Stress Out of Saving for a Down Payment
Are you dreaming of owning a home, and feeling stressed about coming up with money for a down payment? Coming up with 3.5% or more of the purchase price is enough to scare many perspective buyers away. However, even if you don’t have the necessary funds for a down payment in your bank account, there are many other options that you should take into consideration to come up with the money you need to put a down payment on your dream home.
Possibly one of the easiest ways to get a down payment for a home is to borrow against your retirement account. Many people have been investing in a 401(k) plan or traditional IRA for years, and first-time homebuyers may borrow up to $10,000 for their down payment without incurring a penalty, so long as you pay it back. For those who are self-employed—or if your employer allows it—you can also borrow up to $50,000 from your current 401(k) and pay yourself back over five years at a low interest rate.
Another thing you can do is look for down payment assistance grants. Down payment assistance and community redevelopment programs offer affordable housing opportunities to first-time homebuyers, low-income and moderate-income individuals and families who wish to achieve homeownership.
In Maryland there are many such opportunities and even some that are linked to your place of employment. There are FHLB grants of $5,000 that can be piggy backed with SELP/CDA money, there are Live Near Your Work Programs and some lenders have special in house programs. And, if you're thinking about buying in Baltimore City - if you participate in the Live Baltimore Trolley Tour and take the education program you can qualify for another $4,000 grant.
Family is another option that you may want to take into consideration when it comes to securing money for a down payment. Sure, you may be too proud to want to ask for money, but if your family can help you and your family move into your dream home, isn’t it worth it? If you do get help from a family member keep in mind the lender will ask you to sign a form called a gift letter, explaining the relationship and the lender may also require your parents to explain where they got the money and prove that they are financially able to make such a gift. One of my clients recently did this and now they are living in their new home. Be sure to check with your loan officer first though because some loan programs do not allow gift funds for down payment and the money for your downpayment has to be yours. Just one more reason to be sure that you are preapproved for a mortgage before you start looking.
If you’re still not finding the money to put together for a down payment, there’s always the creative lease/purchase agreement. Homeowners who can’t sell their homes in this market will be more amenable to cutting a deal with buyers and may be willing to take part in a lease/purchase agreement, where you rent the home you want to buy and a percentage of your rent is applied toward the down payment. If you go this route, make sure you get a contract outlining all the details so both parties are safe. I am working with a seller and buyer/buyer's agent right now in a lease purchase option. The buyer needed to work on their credit first so we all sat down and wrote up an acceptable agreement and the buyers are living in the house and the price was agreed upon, they are paying rent and have been for 8 months now and building their credit. In 2 months they will settle on their home.
Adding a down payment option to your wedding registry is gaining popularity among those just starting out in life together. Several mortgage companies allow those getting married to set up a down payment registry. What a great way to celebrate the joining of two people in holy matrimony than to help them buy a house. You can set up a trust account at a bank and provide guests with the account number and have them make deposits to the account instead of purchasing a gift. This is fantastic, I have done this with the daughter of a client of mine and they are just about ready to buy.
If none of these things will work for your specific situation, there’s always the old fashioned “saving for a rainy day” tactic. Try putting aside 10 percent of your paycheck each week and make an effort to bring a lunch to work instead of going out. If you’re married, use the money you would spend on birthday, anniversary and Christmas presents and put that toward your down payment. You might also need to forget that vacation this year. It may seem like a lot, but the sacrifice will be well worth it when you’re living in your new home. I received an email from a friend the other day about a large pickle jar by the dresser and at the end of every day the couple would empty their pockets and pocket books of all the change into the pickle jar to save money for their childs college education, but this would also work for saving for a downpayment.
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