How to Come up with a Down Payment?

For many first-time homebuyers, the biggest challenge to homeownership is the large chunk of change needed to put down on a mortgage. This is commonly referred to as a down payment.

Depending on the loan program you choose, a lender could require you to put down as little as 3% or as much as 10%. Considering the average home sales price in Q2 of 2022 in the United States is $440,000, according to the St. Louis Federal Reserve Bank, that means a borrower could shell out between $13,200 to $44,000 just for the down payment.

That’s not all either. There is almost always closing costs associated with any loan when buying a home.

This can make homeownership challenging and, in many cases, unrealistic for first-time homebuyers. However, there are a few programs and measures you can take advantage of to help offset this cost to get into your first home.

Down Payment Assistance Programs

It’s no secret for many towns and cities. More homeowners equal more property tax dollars that come in every year. In an effort to get more people into homeownership, many cities, counties and state housing agencies now offer down payment assistance.

Each program is different and will offer the homebuyer varying amounts of assistance. In some instances, the agency can cover 100% of the down payment. Other agencies might cover the closing cost of a loan. The main thing is assistance is out there for those who need it.

Many of these programs are limited to low to moderate income families or require you to live in a certain area. Check the program guidelines before applying to make sure it meets your purchasing goals.

In exchange for the assistance, the programs will require the borrower to stay in the home for a specified amount of time. If you sell or refinance before that time period is up, you could be required to pay it all back.

Some programs serve as a loan that is paid back over a 5-to-10-year period and includes interest. These figures should be considered when budgeting for your home purchase.

Gift Funds

Gift funds have become increasingly popular for first-time homebuyers. Each lender will have their own requirements on who is allowed to give gift funds, but generally they can only come from family members.

It must be an actual gift too. This means the individual giving the gift cannot require you to pay the funds back in anyway. Check with your lender on the guidelines for gift funds. Although the person giving the gift may want to pay the entire down payment, a certain percentage of the funds to close must come from the borrower.

401K Funds

While many borrowers do not have funds for a down payment sitting readily available in their bank account, many do have large amounts of cash in their 401K retirement plans.

There are two ways borrowers can access the funds from their retirement plans, take a withdrawal or take out a loan.

The withdrawal will come with a hefty penalty in most cases. Each retirement plan is different, but the standard early withdrawal penalty is 10%. On top that, you will have to pay taxes on the money you withdraw depending on your tax bracket. It is highly advised that you talk with a financial adviser to figure out the long-term impacts of a withdrawal.

A more popular option is a 401K loan. In this situation, individuals can borrow the money needed to cover the down payment and pay it back, to their own 401K account, plus interest. This is an attractive option for many as you are paying yourself back more money than you borrowed.

In either case, the money withdrawn will lose out on potential earnings over time, so the seek the advice of your retirement or financial planner.

Sell Your Stuff

Many people have stuff laying around the house they no longer want or need anymore. Consider selling your old clothes, sporting equipment or furniture in a yard sale.

You could also sell an old car that does not get much use anymore. This can be excellent way to make a large portion of your down-payment.

If you have quite a bit of stocks or bonds, consider selling them in order to come up with funds needed to buy home.

Final Word

While not all options are attractive when coming up with a down payment, remember homeownership is an investment that hopefully overtime will increase your net worth. There are expenses that go into homeownership including unforeseen ones, however, most homeowners will still be on solid financial footing when the time comes to sell their property.

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