Have you thought longingly about buying your first home, only to cancel out that dream once you look at the down payment requirements? It’s true that a mortgage payment often costs less than renting these days, and there are fantastic benefits to home ownership like equity appreciation and tax breaks, but there’s no getting around the fact that they need a whole lot of money, all at once and up front, in order to buy, right?
Maybe not. The good news is that there are more great loan products hitting the market that appeal to first time buyers. So with a little planning, creativity, and sacrifice, you may be able to afford that down payment for your first home, after all. Your credit score will make a big impact on how much you can borrow to buy a house and it is best to check typical credit scores needed for a house morgage based on your preferred financial institution before running a credit check.
Traditionally, banks wanted you to put 20% of the purchase price down in order to get a mortgage, and they would finance the rest. Conversely, during the real estate boom in the early and mid 2000s, lenders were issuing far too many risky subprime and alternative mortgages that allowed borrowers to come in with no money down to get their keys. And while these days, there is far more commons sense and conservatism in real estate and lending once again, most people still don’t have to come up with a 20% down payment. In fact, there are conventional loan programs that allow you to put 10% or even 5% down.
So if we’re looking at a $300k home purchase (which may be a good entry point in many places in California or New York, but you can spend far less in many parts of the country,) that means $60k is 20% down, $30k is 10%, and only $15k is 5% down. If that still seems like an insurmountable chunk of change, don’t be dismayed – Federal Housing Administration, or FHA, loans allow buyers to put only 3.5% down on their purchase. The rates may be a little higher and you may have to pay mortgage insurance, but that will fall off over time and getting into the housing market now is certainly a sound financial move.
All of a sudden, that $300k home can be yours with only a $10,500 down payment. Of course, that’s no small amount, and a lot of first time buyers and young couples or families won’t have that sitting around in savings, as well as costs for escrow and closing and repairs that may be needed.
Here are a few creative ways to help come up with your down payment:
For gyms that only charge $20 a month or so it will hardly be worth it, but for the nicer and pricier health clubs that charge $40 or more, you may want to reconsider. Instead, set up a workout area in the garage or the basement and get back to basics, or coordinate a fitness group with friends in a park.Take a look at your telecommunications.
Cell phone, cable TV, and Internet providers are notorious for overcharging customers. So review your bills and usage and then check around for better offers. You may be able to save $1,000 a year or more!Move in with parents.
Whoa! Now you’re getting crazy! I know that doesn’t sound like fun, but consider the opportunity: by not paying rent for a few months, you’ll probably be able to pocket your whole down payment in short order. And remember that when you start looking for a home, make an offer, and go through the escrow and closing process, you can’t anticipate if it will take 6 weeks or 6 months, so you’ll have the ultimate flexibility by not being locked into a rental lease.
Get a roommate.
If moving in with parents sounds like a one-way ticket to the insane asylum, then consider clearing out that spare room in your current rental and getting a tenant. The extra money – often $400 or $500 a month for one room – can make a big dent in your down payment.
That may seem like nominal savings at first glance, but if there are two people buying one coffee each at $4 every day, or $8 total, that adds up to $240 per month! So by getting a good coffee maker and putting it in a TO GO cup, you can potentially save more than $2,880 over the course of a year!Take lunches to work.
If you think coffee was expensive, add up all of those $12, $20, and $25 lunches at restaurants when you step out from work. Even if you only buy lunch three times a week, that could easily end up with $50 a week in savings per person, or about $400 a month, or $4,800 per year! Wowsers!Only eat out once a week.
Speaking of dining out, how about designating Saturday or Sunday night as the one time a week you eat out? That way, you can splurge on a great meal and it will feel like a special treat, but you’ll save a boatload of money compared to eating at restaurants 2-3 times.
Get rid of the new car.
It’s not a popular suggestion, but would you rather have a new car or a new house? I thought so! Sell your new car and buy a reliable used model and put the savings towards your down payment. You may even be able to go from two cars in the household to one, carpooling, using public transport, or even biking to work.
Before you move into your first home you’ll probably want to go through all of your things and de-clutter anyways, so why not make some money by hosting a yard sale? Or if online sales sounds more your speed, take some nice photos and sell unwanted items on eBay.Get a part-time job.
Extra work on the weekends or a couple nights a week certainly isn’t fun, but it will be well worth it in the short term. And remember that if you’re not making money you’re probably spending money, so a part-time job will help boost your savings account a couple ways!Cancel your vacation.
Vacations can be ridiculously expensive, so plan on a “stay-cation” instead as you’re saving up for your down payment.
Set up a gift account.
Instead of exchanging presents for Christmas, birthdays, etc., set up a separate account and let friends, family, and coworkers know you’d rather they made a small donation to your house fund than buy a gift.
Tap your 401 K or Roth IRA.
Do all of those other options seem painfully slow for amassing a down payment? Well you may be able to cash out a 401K or investment, take a loan against it, or deduct from a Roth IRA. Just be careful because there could be big fees, penalties, and tax consequences for doing this, so talk to your financial planner and CPA first.