Anyone looking to buy a home these days will need a down payment of at least 3% of the purchase price, and probably more. In years past, you may have been able to buy a home with nothing down, but the environment has changed.
However, needing a down payment is not a bad thing. It gives you instant equity. And, you likely have multiple possibilities for putting together enough money for a down payment. Here are some options.
Receive gift money.
A gift from a family member or someone else with whom you have a close relationship may be part of your down payment, in some cases. But first, you need to find out if your lender and type of mortgage will allow you to use a gift as part of your down payment. With some mortgages, you may need to prove that you’ve provided most or all of the down payment yourself. If your lender and loan program allow gifts to be used, you may need to provide a letter and a paper trail for the gift money to prove it isn’t actually a loan.
Take a loan from your 401(k) or other retirement plan.
If your retirement plan allows loans, you may be able to take a loan from it for your down payment. Usually, borrowed funds are not allowed for a down payment, but loans from a retirement plan are an exception (because you’re borrowing your own money). Depending on the terms of the loan, this could be factored into your debt-to-income ratio.
If you have something of value that you’re willing to part with — maybe a recreational vehicle, boat or motorcycle — you can use the proceeds for a down payment. Be aware, however, that you’ll need to create a paper trail, with a full bill of sale and an account statement showing the deposit of those funds.
Receive a windfall.
You can use money you receive from an inheritance, settlement, trust fund disbursement, lottery winnings, family buyout or even a gambling victory, as long as you document it well enough.
Give your savings a boost.
Save any "extra" money that comes by way of tax returns, bonuses, and pay increases in a high-yield savings account. On top of that, look for where you can eliminate needless spending on items such as subscription services, dining out, and coffee runs. Seemingly small spending habits add up and limiting them may help you quickly save for a down payment.
Consider Closing Costs, Too
To be a truly prepared homebuyer, you should not only have a plan to cover the down payment, but closing costs as well. On average, closing costs total about 2 to 4% of the purchase price. Any of these sources of money for a down payment may also be used to cover closing costs.
If you’re ready to buy a home, turn to Logix. We offer a variety of mortgage products, information for first-time buyers to help you better understand the process, and great rates and flexible mortgages whether it’s your first home or your 10th. You can even apply online for greater convenience.