House Shopping: Devise a Down-Payment Plan/ April 25th, 2019
Are you thinking about buying a house in the next year or two? Most Americans still believe that buying a home is a good financial investment, according to the 2017 National Housing Pulse Survey, conducted by the National Association of Realtors. Eight out of ten respondents feel that paying off a mortgage and owning a home by the time you retire was a primary motivation for buying a home, and they consider it a good way to build wealth and increase net worth.
How much do you need for a down payment?
Before 2008, many lenders offered zero-down-payment on mortgages to prospective homeowners. Then came the housing market crash and the Great Recession. As a result, lending guidelines became stricter. You still may find some zero-down-payment mortgages available from quality lenders. Just expect to pay a premium in the form of a higher rate on the loan and/or higher fees, says Tracy Ashfield, President of Ashfield & Associates, Madison, Wis., a mortgage consulting firm that assists credit unions.
"That's why we stress so much to folks that it's important to accumulate some down payment," she says. "You'll get a more competitive mortgage product that will help you keep your monthly payments down." That will save you a lot of money in interest over the life of your loan. "Sit down with your lender as soon as you can," Ashfield advises, "even if you're a year or 18 months away from buying." With your lender, you can go over your income, savings, other assets, and credit score. From there, you can figure out a reasonable down-payment goal. "Maybe you've accumulated a 5% down payment," Ashfield notes. "Or maybe it makes more sense to pay 3% down and use some of your money to pay discount points to buy down your rate a little bit." (Discount points are fees you pay a lender at closing to reduce your interest rate. A point is 1% of the amount borrowed.)
Your best strategy depends on your complete financial picture. Your lender can help you select a down payment and other mortgage features that best fit your financial situation. (Note: If your down payment is less than 20%, you'll generally pay for private mortgage insurance, which protects the lender against losses. That adds to your monthly mortgage payment.)
Where will you get your down payment?
- Save your money. Set aside a certain sum out of every paycheck, before you get a chance to spend it. Also, put bonuses from your job and tax refunds and rebates into savings. See where you could trim costs. If you're having trouble finding ways to save, talk to a credit union financial counselor.
- Get a second job. It may make life a bit more hectic for a year or two, but it might be worth it if it means being able to buy a home.
- Ask for family help. Anyone can give up to $15,000 per year to another person, without federal gift tax consequences (this number adjusts annually for inflation). In other words, your parents could give you up to $30,000 a year and, if you're married, another $30,000 to your spouse. You need not pay income tax on this money.
- Borrow from family. The Internal Revenue Service (IRS) sets a minimum interest rate that a family member would have to charge you for the loan. Be sure you have a written, enforceable note that spells out the terms. A downside: Your lender may count this loan in your debt load in determining your mortgage eligibility.
- Tap your IRA (individual retirement account). The IRS allows a first-time home buyer to withdraw up to $10,000 to use for a down payment ($20,000 if you're married and your spouse also is a first-time buyer). You pay no penalty for early withdrawal, but you may owe taxes, depending on the type of IRA. You must use the funds within 120 days of withdrawal. See IRS Publication 590 for details.
- Look at your 401(k). See if you can borrow from your company's plan. Be sure to continue putting money into your 401(k), too, so you can get your employer's match.
- Look into first-time buyer assistance programs. You might be eligible for a state or local program that provides down-payment assistance to first-time buyers. Your lender may know of some.