16 ideas to help you drum up money for a down payment
Coming up with a big pile of cash to buy a home may seem daunting, especially if it's your first place. Here's expert advice on the many ways you could make it happen, along with 4 dead-end options to avoid.
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If you’re hoping to buy a home to take advantage of cheaper home prices and attractive mortgage interest rates, your first question may be: "Where do I find money for a down payment?" (Bing: Where are interest rates right now?)
Below is a list of workable ideas and those to avoid. We gathered expert advice from Bill Banfield, director of capital markets for Quicken Loans; Jeffrey J. Belonger, manager with Infinity Home Mortgage Co. in Cherry Hill, N.J.; and EJ Hawkins, counselor with ClearPoint, a national nonprofit credit counseling service.
First, a few tips:
- Check with your bank or mortgage broker that the source of your down payment is approved in your loan’s rules.
- Ask real-estate agents about state and local housing incentives, grants and loans and what local lenders offer.
- Some down-payment ideas are safer than others; a few have toxic consequences to your taxes or retirement savings. Study your options carefully and review your plan with a certified public accountant or a nonprofit housing counselor approved by the Department of Housing and Urban Development (find one here or call 1-800-569-4287).
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- Keep a paper trail of every move so you can document, for your lender or the tax man, each income source, asset sale and transaction.
- Be wary of mortgage fraud. The scam you’re most likely to encounter is when a mortgage professional suggests inflating the price of a house in order to kick back cash to you for closing costs. It sounds tempting, but you’d be getting fleeced by overpaying for the house and you could face jail time if you participate. Report crooked players to your state attorney general’s office (find yours here).
Here is a list of ideas for scraping together your down payment.
- On our blog, 'Listed': Do we really need 20% down payments?
Low-risk sources of cash
1. Pull from savings: The time-honored way to fund a home purchase is to set aside money each month. Use an automatic electronic transfer through your bank or credit union. Choose an account that that earns the most interest possible while letting you access the money. Review account types and learn how to "ladder" certificates of deposit by reading this article.
2. Liquidate miscellaneous assets: Sell your nice car, buy a beater and apply the difference to your down payment. Sell your boat, motorcycle, collectibles or other assets. Use your tax refund. Call in money that people owe you.
3. Sell stock options: If stock options are part of your compensation, selling them might earn you cash. Contact your human-resources department to learn the rules.
4. Sell taxable investments: Sell stocks, mutual funds, bonds and other taxable investments before touching money held in tax-deferred retirement accounts, such as 401(k)s and IRAs, which require you to pay significant penalties when you sell.
- MSN Money: Now that's a tax error: $200 million refund
5. Cash in a life-insurance policy: So-called permanent life insurance policies (not "term" policies but "universal" or "variable universal life" or "whole life" policies) grow in value as you pay into them. When enough value has accumulated, you can take cash out or borrow against them. Talk with your insurance agent to learn your options.
Caution: If you no longer need the insurance, this could be a nice source of ready cash. But first-time homebuyers usually are young, have children and need the protection of insurance; withdrawing money from a policy could reduce or eliminate your death benefit, leaving your family in financial trouble if you die. You also can lose coverage if you borrow against the policy but don't pay it back. Ask your insurance agent to outline the pros and cons. Call your state's insurance commissioner's office if you have questions. (Find yours with this map.)
Friends, family and employers
6. Use a gift: Some mortgages – loans insured by the Federal Housing Administration, for example – let you apply gifts from immediate family members toward your down payment. You’ll need a "gift letter" from the person who gave you the money, verifying that it doesn’t have to be repaid. Be prepared for the lender to ask for copies of checks or wire transfers.
7. Try your employer: Some corporations, universities and local and state governments have programs to provide employees with down-payment assistance. Check with your human-resources department. For example, in South Dakota, 19 employers participate in a state-sponsored Employer Mortgage Assistance Program that lets employees take out a 2% interest rate second mortgage for $600 to $6,000 to cover closing costs and down payment. Each year, the city of Baltimore and state of Maryland contribute as much as $6,000 to 100 city employees (PDF) to help them buy homes within the city. These programs are meant to help keep valued employees in their jobs and closer to work.
8. Enlist a partner: A co-owner can help by sharing costs, including the down payment, and by signing on to be responsible for repaying the loan if you can’t quite qualify for a mortgage. A lender can explain the details.
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First-time homebuyers often cite the lack of down payment money as the biggest obstacle to making the transition from renter to homeowner. But these buyers may be missing an opportunity to receive down payment assistance. If you meet some basic criteria, there are many areas where you can qualify for down payment assistance (DPA) and/or some grants that you can use to cover part or, sometimes, up to 100% of your down payment without the need that you come up with the money. These programs are available all over the country and in all different levels of the government: Cities, counties, states and federal. We put together the information to show you how it's done.
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