Your savings account is pretty bare right now. But you plan on buying a house in the near future. How can you possibly raise enough money for a down payment?
For many, it’s not an issue. Popular loans types like the VA home loan, or loans offered by the United States Department of Agriculture, known as USDA home loans, require zero down payment.
Yet there are a group of home buyers who opt for an FHA or conventional loan, for which minimum down payments range from 3.5% to 5%.
Tim Erickson, mortgage planner at Marketplace Home Mortgage, LLC in Edina, Minn., says he has seen many of his clients come up with plenty of creative ways to accumulate the cash to get the ball rolling on their home buying experience.
“We have two different types of clients. We have those who work with financial planners. They usually have a solid down payment and resources to maintain a house once they buy it,” he says.
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Then, there are the others that he works with to strategize how they can come up with the down payment because they usually don’t have a stash of cash or sometimes a sense of how to start saving.
“There is a big gap in America as a whole when it comes to savings. People don’t have the savviness to save first and then budget the rest of their stuff off the rest of the money,” he says.
Many times, people come to his office for a mortgage pre-approval before ever figuring out the dilemma of a down payment.
“But I don’t want to tell them what they can afford. This is their life. They have to figure that out. So to help them, I question them on how much do they want to pay each month, how much they are paying now for housing and then back into a purchase price,” he says.
That’s when they can figure out how much down payment they need, and the minds start working on how that money can be achieved.
Some of the ways he has seen people get that down payment include:
Down Payment Gift Money – It’s a way people can get into a house when they have no savings, he says. It is an option if you have people that can give you the money. But documentation is very important on this issue. If a parent, grandma or whoever gives you the money, you need to fill out a gift letter, validate it with a copy of the check and your deposit receipt into your bank account. There are some lenders still out there that won’t allow a down payment gift unless you have 5 percent of your own money into the mortgage. “But most lenders have become more lenient on that criteria the past two years,” he says. For instance, none of the buyer’s own money is required when they receive the full 20% down payment as a gift. With an FHA loan, the entire 3.5% down payment can come from a gift.
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Gift of Equity – Erickson has a recent client who is buying a house from her immediate family’s trust. The trust has agreed to sell the home worth $150,000 to her for $75,000. So, instead of any cash changing hands, it’s called a gift of equity. “The woman doesn’t have to come up with the money herself, and the family is happy because the home is staying in the family,” he says.
Sell Something – Do you have an amazing ruby ring left to you by your dear aunt? Or do you have a sports car tucked away in the garage that you don’t drive anymore because the whole family doesn’t fit in it? To raise the money for a down payment, you can sell those precious items for something you really want and will use – a house. But make sure you have evidence that the car, jewelry, gun collection or whatever it is you are selling is actually yours. Plus, get a bill of sale, copy of the check from the purchaser and a copy of the deposit slip. Documentation is everything when it comes to putting money in the bank for a down payment, Erickson says.
Just Start Saving – “If I could talk with potential clients a year in advance, I could advise them about starting a savings account for a down payment and putting a certain amount of money away each month,” Erickson says. “If you set it up direct deposit from your employer, you don’t even have to think about it.”
Get a Part-time Job – Your weekends are free. So take a temporary job, hopefully in some profession that you like, and just put away those checks into your savings. Keep all your pay stubs and deposit slips.
Line of Credit – Use your good credit history and take out a line of credit or personal loan and deposit the full funds into your bank account. There is a waiting period, sometimes a few months, before you can use that money for a down payment. Check with your lender about their rules. “If you own your truck or car free and clear, you can possibly put a loan on that, and have a down payment,” he says.
Borrow from Your IRA or 401K – Even people who don’t save regularly often have a 401k or IRA from which to borrow down payment money.“This is becoming somewhat popular,” Erickson says. “You have to pay it back though, and it’s within a few years. We usually strongly discourage them not to do that because they are taking money out of the market,” says Erickson.
Cash in Stocks, Life Insurance – Liquidating stocks and bonds and IRAs or the cash value of a life insurance policies have been done by some of Erickson’s clients. “With whole life policies, it has to be a certain number of years that you have been paying in before you can cash out,” he says.
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