As you think about entering the real estate marketplace, especially as a first time homebuyer, you are confronted with saving money for a down payment and closing costs for a home.
There are many programs that require as little as 3% as a down payment. For example, a $400,000 home would require a minimum of a $12,000 down payment.
On top of your down payment you will also need to bring closing costs to the table. Closing costs are the hard costs of securing a mortgage and include, appraisals, title searches, title insurance, etc....
Your closing costs can run anywhere from 2-4% of the amount borrowed.
In this case, you would have to come up with $20,000 to $28,000 to purchase a home.
Traditional Down Payment Source
Traditionally, the money for your down payment and closing costs come from money you have saved. You provide the funds from your own savings account.
As a home buyer, you probably have saved for many months or even years to fund your home purchase.
This is the route that many home buyers take, as they don't know any other way.
Not So Traditional Down Payment Sources
Many potential home buyers can afford a monthly mortgage payment but may fall short of the money in pocket they need for the down payment and closing costs.
And, on top of it, saving enough money for the down payment can seem to take forever, all the while you are paying your landlords mortgage down instead of your own.
Let's look at some other sources you may be able to tap into to help you buy a home.
These sources of money may be able to fund or partially fund your down payment and closing costs when buying a home.
Gift funds is a gift of money. Not a loan.... a gift. Often, a parent or other close family member is happy to help you fund your first purchase with some cash to get you on your way to owning a home.
Many loan programs make it very easy for a family member, spouse, partner, etc... to gift money for a down payment and closing costs on a home.
Some programs might even allow someone with a vested interest in you to assist with a down payment, such as an employer.
If you have someone willing to gift you some cash for your down payment, talk with your mortgage officer and he can best tell you how to proceed.
Don't run off half cocked thinking anyone can gift you money. Each loan program has different rules about gift funds.
Tap Into Your 401k or IRA
While tying to save up money to buy a house, you probably have been working. And during that time you may have been building up savings in a retirement account like a 401K and/or IRA.
There are often provisions for you to borrow or take some portion of your funds to provide a down payment to purchase a home.
If you have saved up some money in one of your retirement accounts, explore the pros and cons of using some of your long term savings to help fund a down payment for a purchase to get your foot into the real estate market.
Down Payment Assistance
Many states have an agency that assist home buyers in a low to moderate income bracket in purchasing a home. This includes providing favorable mortgage products, but also in providing down payment assistance.
Here in my state, we have MassHousing, which not only provides homeowner education, home loans they also provide down payment assistance for Massachusetts residents of up to $25,000.
Most states will have a public or quasi-public agency to assist home buyers in their state. Connecticut has Connecticut Housing Finance Authority or CHFA. New York's agency is Homes and Community Renewal or HCR.
On top of assistance through your state, different cities in your state, may have programs as well that offers down payment assistance if you purchase a home with in their city limits.
Seller Paid Closing Costs
As I pointed out previously in the post, not only will you need a down payment, you will need money to pay for your closing costs for your loan.
While closing costs are different from your down payment, having the seller pay closing costs frees up actual cash to put towards a down payment.
Having a seller pay closing costs can be a viable option in a buyer's market but can be near impossible during a seller's market. Discuss with your agent the possibility of negotiating sellers to pay your closing costs.
We have discussed the traditional saving money for your home purchase as well as some not so traditional ways.
If you are committed to buying a home, talk to your mortgage broker and agent and find out what other ways can help you fill in that gap for down payment and/or closing costs.
Maybe you can't cover all of your down payment, but anything is better than nothing!!