It seems impossible to get enough money for a down payment on a house. It is the most common barrier to the Great American Dream of homeownership.
In spite of this, every year we help buyers buy their first home. We have learned a lot about how buyers accumulate a down payment on a house!
How much money do you need for a down payment?
While we are in this strong seller’s market (the sellers have more control) you need to look at things in terms of what the seller wants. And, besides a high sales price, the seller wants as little risk and inconvenience as possible. That is why 20% is considered “standard” and safe down payment on a house. Anything lower is considered a higher risk and anything higher is considered a lower risk for the seller.
It is possible to get a loan with as little as 3.5% down payment- you just can’t expect to use that sort of loan to buy the home that every other buyer wants to buy.
A Financial Advisor Shares 5 Ways to Get a Down Payment
I asked fellow Bruin, Matt Crisafulli, to help people understand that they CAN get that down payment on a home. Many people think it is so completely out of reach they never even start the process.
Matt is a fee-only financial advisor and his job, literally, is to help people achieve their financial goals. We love solving the ills of the world over breakfast and good coffee. This post is just the start. Without further ado, take it away Matt!
Matt’s Five Tips
Automate Your Savings. The saying “out of sight, out of mind” is your best friend when saving for a long-term goal. The less you have to think about saving to make it happen, the better off you will be.
Open a separate savings account (not at your primary bank) and set up automatic transfers. The automation of this process will stop you from coming up with excuses to spend the down payment money month over month. Making sure you choose a bank other than your primary bank, will make it that much harder to transfer the funds back into your primary checking account.
I recommend a high yield, online savings account for the best interest rate. It won’t be a lot of interest, but your money will be safe and you won’t be tempted to spend it.
Defer Excess Income. To help you reach that savings goal a little faster, defer your salary raises and bonuses to your savings account. Receive a $500 bonus? Straight to the down payment fund. Get a 3% raise? Increase your monthly savings by 3% too! If you were comfortable living on your old salary, take your annual raise and/or bonuses and use those to supercharge your savings! The sacrifice is only temporary, and the payoff will be well worth it!
Re-allocate Debt Payments to Savings. Most people have some type of debt they are paying back – an auto loan, a credit card, a personal loan, etc. – that is inhibiting their ability to save. Once one/some of those debts are paid back, reallocate those monthly payments into the down payment fund. For example, once the credit card balances are paid off, take that monthly payment, and add that to the monthly savings. The extra savings will really add up over time!
Review Expenses to See Where You Can Cut Back. We don’t like to admit it, but most of us overspend in at least a few areas of our lives, such as dining out, shopping, or entertainment. Review your current spending to see if there are any areas you can cut back to help you achieve your goal of homeownership sooner. I guarantee the pain of cutting back for a short period of time will pale in comparison to the joy of buying that first property.
Get a “side hustle”. When all else fails, increasing your monthly income will help you reach your savings goals. Pick up extra shifts. Volunteer for overtime. Do work for your friends. The important thing is that the excess income gets saved month over month. The side hustle doesn’t have to be a different, unrelated job, but rather just a way to increase your income beyond your regular 9 to 5 job.
Make sure you save in a higher interest-paying account!
Most people have their savings account at the same institution as their checking account. They will get a much higher interest rate at a Capital One, Ally or Discover (online bank)
Benjamin Franklin said, “Money makes money and the money that money makes, makes more money” perfectly describes the power of compounding
Matt told the story of one of his clients who managed to save 2,000 a month by making sacrifices like living in a small apartment or not getting expensive coffee or meals out. The interest they made from their savings was between $12,000 – $16,000! That is additional for doing nothing more than placing your savings in the right account.
Buying a home is not just a financial decision. It is a life decision, so consider doing things that are counter-intuitive. With that said, here are some little known things that can get money for a down payment on a house.
Here are a few more ideas to get a down payment
Withdraw from your IRA
You can “borrow” without paying the 10% early withdrawal penalty to ge money for a down payment on a house. You do this as long as you have not bought a home in the last two years. This is a per person limit, so if you are married you could each do this for $20,000.
Borrow from your 401k
If you borrow from your 401k at very favorable rates and stretch your payments over 30 years (depending on the plan). Remember- many times your employer is also contributing to the 401k, so this is an excellent benefit. Caveat: you can only take is $50,000 or half of the vested balance or half of your vested balance, which ever is less
Bank of Mom and Dad – I know you don’t want to ask, but I encourage you to consider it. Your parents might have money in super conservative money market funds or savings account, earning next to no interest. If you are uncomfortable about asking for a straight up gift, consider asking for a loan. While this is not a formal, recorded obligation, your relative could see this as a better use of their money.
Mom and Dad want to help their children, but you can make them feel better by including a third party company that can track the loan for you. They can track payments, tax reporting and interest calculations. This makes the whole thing a bit more arm’s length and adds an extra layer of authority.
Investors – Investors are not always a faceless bank. Alek and Alex purchased a home together with Alex’s’ parents, who viewed the purchase as an investment and a second home. They worked out a detailed agreement regarding investment dollars, monthly obligations, any fixes and improvements as well as a detailed exit plan. I have seen friends buy together, even groups of siblings. This idea is called equity sharing.
An incredibly important part of any equity share is a detailed agreement on the exit plan. It is important to know, up front, how the parties will decide on timing and property value of any sale. One such plan that I helped put together stated that the parties would get an appraisal from a particular appraiser 5 years from the purchase date. All parties had the right to execute a buyout plan at that time or all parties could agree to sell.
DownPaymentResource.com – It is not just an urban myth! DownPaymentResource.com is a company that compiles all of the various programs, grants, and agencies available to help home buyers buy a home. Their website matches your characteristics with program guidelines, spitting out a complete list of resources suitable for you!
Not every strategy will be right for everyone. The important thing to consider is to be patient with your savings timeline and realistic with your savings goals. With diligence and a concrete strategy to reach your financial goals, you will have the ability to make the dream of homeownership a reality.
Ready to take the next step? Find out what a great Glendale Ca agent can do to help make your buying dreams a reality!
Matt Crisafulli, EA, CFP® is a Partner at ACap Asset Management as well as a UCLA Alumnus. He is a Fee-Only CERTIFIED FINANCIAL PLANNER ™ and an Enrolled Agent licensed by the IRS.
ACap Asset Management, Inc.
16133 Ventura Blvd, #600
Encino, CA 91436