If a home purchase is in your future, now is the time to start saving for the down payment. Why get going now? Because it could take a while to save up the 20 percent for a down payment.
Of course, you can buy a home with less than 20 percent down. The Federal Housing Administration has lowered down-payment requirements for mortgages it insures to as low as 3.5 percent to make it easier for buyers to get into the market.
But if you contribute less than 20 percent down on a home purchase, you’ll be required to buy mortgage insurance. It protects the lender, not the buyer, from the chance you’ll fail to make your payments.
Conventional mortgages require private mortgage insurance (PMI). Explains Investopedia:
Private mortgage insurance typically costs between 0.5 percent to 1 percent of the entire loan amount on an annual basis. On a $100,000 loan this means the homeowner could be paying as much as $1,000 a year, or $83.33 per month — assuming a 1 percent PMI fee.
With an FHA mortgage, the insurance is called a mortgage insurance premium (MIP). Click here to see the FHA’s costs and requirements.
With mortgage insurance in mind, you can understand why it pays to save up at least 20 percent before taking out a mortgage. While that’s a big job, many buyers manage it. It takes focus, discipline and, often, outside help.
1. Look into down payment assistance programs
You might be surprised how many programs exist to help buyers — especially first-time homebuyers. Last year, RealtyTrac counted 2,290 down-payment-assistance programs across the country.
One way to find such programs is through Down Payment Resource, which calls itself “a Web-based software company with a mission to connect people with hard-to-find financial resources.”
The site takes your address or city, estimated annual income and number of people in your household. It asks if you are an armed services veteran or a Native American. It delivers a list of programs for which you may be eligible and contact information for participating lenders in your area.
Or, look for programs near you by typing “down-payment assistance programs” and your city’s name into a search engine. Income requirements typically apply, but check to learn if you are eligible.
If you are a veteran, you may be able to buy a home with no down payment.
2. Set up a dedicated account for a down payment
Get going by setting up a savings account that pays the most interest possible. If you’ll be tempted to divert the money to other needs, set up an account solely for the down payment.
3. Put savings on auto pilot
Saving is painless and virtually unnoticeable when you establish an automatic withdrawal that pulls money monthly, twice monthly or weekly from your checking account.
4. Dedicate windfalls to your goal
Pledge to put every tax refund, gift of cash, purchase refund and work bonus into your down payment account. If you win any money playing the lottery, set that aside towards a down payment.
5. Stash away every raise
When you earn a raise at work, carry on as if it never happened. Have the difference between your old and new paychecks funneled automatically into your down payment savings. And if you do any side jobs, set aside also!
6. Sell your stuff
Sell your possessions for cash to fatten your account. Having a garage or yard sale can generate some fast money to set aside for your home down payment. Facebook has many free groups to join to sell off any unwanted or unused items. Search for your county and area. Things sell quickly in the Facebook Marketplace!
7. Sell your extra means of transportation
Pump up your savings fast by disposing of assets that have real value, like a car, boat, motorcycle or expensive sports equipment. Do without or replace the car with a cheap beater.
8. Sell taxable investments
Plan to sell investments to raise money for your down payment? If so, sell stocks, bonds, mutual funds and other investments in taxable accounts instead of touching money held in tax-deferred retirement accounts like IRAs and 401(k)s. Selling investments in tax-deferred accounts carries stiff penalties if you sell before retirement age.
Dip into retirement savings with your eyes wide open. Make sure you know all the ins and outs before raiding your retirement plan though!
9. Get help from family
Rules differ by lenders on whether and how much help you can get from gifts for your down payment. Zillow reviews those rules.
One example: The FHA lets borrowers apply gifts from immediate family members toward a down payment. You’ll be required to produce a “gift letter” from the giver, verifying that the money is not actually a loan. You’ll probably also need to show copies of checks or wire transfers so your lender can verify the origin of the gift.
Just be wise that borrowing from family can put a strain on the relationship if proper paperwork is not in place and you default on a payment!
10. Ask your employer for help
Some companies, colleges, universities, and state or local governments have programs to help employees with down payments. Ask your human resources department about possibilities where you work.
When negotiating for a job, you may be able to ask your new employer to include down-payment assistance as part of your compensation package — as a signing bonus or relocation assistance.