If you’re a first-time homebuyer and don't have a lot of money for a down payment, here’s good news: you can now buy a home for less than 20% down. Keep in mind that there are some additional costs and risks to buying for less than 20% down, however.
Regardless of how much you put down for a home – whether 5% or 25% — you’re going to need to save up. There’s going to be closing costs and other fees in addition to your down payment. Here’s some ways to save up.
1. Keep your goal in mind and cut out unnecessary expenses
Chances are, you have expenses each week that are not totally necessary. Decide what you can cut out and put this money towards your down payment instead. For more tips on ways to save, check out our article on saving up for an emergency fund – many methods mentioned there will also work when saving up for a down payment.
2. Invest the cash you have sitting around
If you have a few hundred or a few thousand dollars in an account that’s not earning much, invest it. Every dividend or bit of interest earned will help. If you’re looking to buy soon, consider a high-yield savings account like our Money Market account. If you’re looking at an intermediate term, consider a share certificate. And if you’re looking to buy after a longer period of time, consider the stock market.
3. Borrow from the cash value of a life insurance policy
If you have accumulated a substantial cash value in your life insurance policy, you may be able to borrow from it in order to raise funds for a down payment. You may be able to borrow up to 90 percent of your policy's cash value, and the interest rate is usually substantially lower than rates for bank loans and credit cards. However, any outstanding loan balance will be subtracted from your death benefit when you die, reducing the amount your beneficiaries will receive upon your death.
4. Consider using a gift
Most mortgage lenders allow gifts to be used for part of the down payment on a home. However, lenders often require borrowers to contribute some of their own money toward a down payment in addition to any gifts. You'll also need to submit a letter to your lender that proves that the money is a gift rather than a loan, and that you are not expected to repay the funds. You may also have to submit documentation, such as bank statements, showing the funds withdrawn from your benefactor's account and deposited into your account.
5. Borrow from an employer-sponsored retirement plan
If you participate in an employer-sponsored retirement plan, one way to come up with money for a down payment is to borrow the money from your plan. Many employer-sponsored retirement plans (e.g. a 401(k) plan) allow you to borrow against the funds in your account. Depending on the rules established by your employer, you may be able to borrow against your own contributions and the earnings on this money. You may also be able to borrow against contributions made by your employer if you are vested in those dollars.
There are some caveats here. Interest rates on these types of loans are generally only one or two points above the prime rate. Although loans from retirement plans generally must be paid back within five years, the repayment period can be longer if funds are used to purchase a primary residence. Many plans carry restrictions, so consult your plan administrator for more details. If you leave your employer before you repay a loan from an employer-sponsored retirement plan, the balance of your plan loan will typically be due immediately. If it's not repaid on time, the loan balance will be deemed a distribution for tax purposes, and you may be subject to the 10 percent penalty tax.
6. Withdraw from a traditional IRA
You can withdraw funds from your traditional IRA and use them for a down payment. However, all or part of a distribution from a traditional IRA must be included in taxable income in the year received. While funds distributed prior to age 59½ are generally subject to a premature distribution penalty, an exception applies when the distribution is used within 120 days to pay the costs of acquiring, constructing, or reconstructing the principal residence of a first-time homebuyer. There is a $10,000 lifetime limit on distributions covered by the first-time homebuyer exception, however.
7. Automate your saving
There’s two common ways to automate saving. One is to set up an automatic monthly or bi-monthly transfer from your checking account into your savings account. Patelco Online™ makes it incredibly easy to do this online or via the Mobile App.
A second method of saving is to have your employer split your paycheck between 2 direct deposits – one deposit to your normal checking account to pay your monthly expenses and one deposit to a savings account that’s earmarked for a down payment.
8. Skip vacations for a year or two
If you save the money you normally would have spent on vacationing, you can make significant contributions to your down payment.
9. Reduce your high-interest debt
If you’re paying high interest on a credit card, this can seriously limit your ability to save. Check out our tips for paying off debt. The sooner you pay your debt down, the sooner you’ll be able to save for a down payment.
10. Get a temporary second job or seasonal employment
If buying a home is really important to you, the sacrifice of working a second job may help you may substantial contributions to your down payment fund. Consider this option carefully as it will cut into your time and likely add stress to your life – but if you set up a specific timeframe (such as only during one holiday season) and keep your goal in mind, you may end up very satisfied with the result.
We’re always here to talk – including about buying a home. Contact one of our Home Loan Consultants if you want to talk more about down payments. As a Patelco member, you also have complimentary access to BALANCE, which offers free consultations online or on the phone. They can help answer your questions about the best ways for you to save.
Source: Broadridge Financial Solutions, accessed October 22, 2019.