The down payment is often the barrier that keeps potential homeowners from buying a home. A common fallacy is that you need 20% down. You don’t always. Many programs allow much lower amounts. The VA and USDA loan don’t require any amount of money down. No matter how much you must come up with, there are ways to make it happen.
Read on to learn the top ways borrowers come up with the money to buy a home.
Get Out of Debt
You probably don’t think of getting out of debt as a way to save money, but it is. Think about it. You pay money every month to your debts. If you didn’t have them, you’d have extra money. You could use that money to put down on a home.
Right now, total up how much you pay in credit card debt each month. You might be surprised at the total. Now think about how much you could save if you didn’t have to make those payments each month. It might be time to get out of debt.
Set Up Automatic Savings
Savings tends to come last on our priority lists. We always seem to find a way to spend the money before it hits our savings accounts. Don’t let that happen to you. Instead, set up an automatic savings plan. It’s similar to automatic deposit, which you may already have. Instead of depositing the money into a checking account, though, you send it to your savings account.
The next trick is not touching the money. Hopefully you can use the out of sight out of mind theory. Let the money grow so you can use it to buy a home.
Bank Your Windfalls for a Down Payment
Windfalls probably happen to you several times a year. A few good examples include:
- Tax refunds
- Bonus checks
If you receive any of these, don’t spend the money. It’s money you never had before, so don’t use it now. Instead, put it right in your savings account. This is a great way to give your account a quick boost, especially if you receive a large windfall.
Borrow From Your IRA
If you are a first-time homebuyer, you can withdraw from your IRA without penalty. This is a one-time opportunity and is limited to $10,000. If you are married, though, you can each withdraw $10,000 for a total of $20,000.
Keep in mind, though, you will owe taxes on any regular IRA withdrawals. If you have a Roth IRA, you must have held the account for 5 years before you can withdraw the funds. Roth IRA funds don’t require tax payment, though, since you already paid taxes on this money.
Gifts From Family and Friends
You might be surprised to learn which family members are willing to help you buy a home. Your parents or grandparents may have money set aside for this occasion. Most loan programs allow you to accept gift money and use it as down payment funds. Before you accept it, check with your lender. You want to make sure you go about the process the right way. Lenders must:
- Document receipt of the funds in your account
- Document the source of the funds
- Make sure there are no new loans created
Some programs allow the full down payment to be a gift, so don’t be afraid to ask your lender!
Recreate Your Budget
If all else fails, you might need to recreate your budget. This may mean trimming the fat, so to speak. You may have to evaluate where you spend your money and cut back in certain areas. For example:
- Eating out
- Salon visits
- Coffee trips
You might be surprised how much you spend. We encourage you to look back at the last few months. This way you get a good idea of the average amount you spend in these categories. You can then cut back and put the money towards your savings.
The Final Word
Saving for a down payment is not as hard as it seems. If you look at the big number, say 20% of $100,000, that’s a lot of money. But, if you break it down into more manageable chunks, you will get there faster. Rather than focusing on an amount, focus on your habits. Change one at a time and watch the savings stack up.
Before you know it, you’ll be buying your own home with a sizable down payment.