Five Tips To Help You Save For A Down Payment

One of the greatest financial struggles a family ever faces is making the down payment on a first home. A down payment of 5% is truly just the beginning. In addition, there are closing costs that can easily total 2% of the purchase price. Added to that, the underwriter will want to be certain you have adequate cash reserves to make a couple of payments to protect you against the interruptions in your cash flow.

If you are hoping to buy a $150,000 home, you’ll need $7,500 for a scheduled payment, another $3,000 or so for closing costs and another $2,000 or so in cash reserves or a total of about $12,500.

The following is some tips to help you save for your down payment or reduce the requirements.

1.  FHA Loans (it.Ly/11Ztpv8): FHA loans require only a 3.5% down payment. FHA loans are provided through the Federal Housing Authority. In some cases, interest rates may be fractionally higher, but for first time home buyers struggling with a low payment, any slight difference may be overwhelmed by the smaller down payment. Not all lenders offer FHA loans. If you are struggling with the down payment, make sure to work with a lender that can offer a FHA loan.

2.  Seller Pays Closing Costs: As you work with your real estate agent, talk to her about having the seller pay your closing costs—even if you just have to add them to the purchase price. In a “seller’s market” where sellers get their way on everything, this may be the right approach. In a “buyer’s market” where buyers get their way on everything, you can probably offer less than the asking price and still get the seller to meet the closing costs.

3.  Ask for your IRA or 401k (it.Ly/dGe8zL): The IRS will allow you to withdraw up to $10,000 from your IRA for qualified first time home purchase. Both you and your spouse can be achieved. You may be better off, however, leaving your cash in the IRA. The mortgage loan underwriter will likely count the cash in your IRA toward the cash reserves. For that purpose, you’ll pay no tax or penalty. If you withdraw money from your IRA for your down payment you will be obliged to pay to pay the tax on the withdrawal—but no penalty. Talk to your employer about borrowing from your 401k. If it is allowed, you’ll pay no tax and no penalty and you’re basically borrowing from yourself.

4.  Sell your car. If you get two cars and can get by with one, sell the other one. If you can get some cash for the down payment and pay off the car loan at the same time, that can help you maximize your ability to be eligible for the mortgage.

5.  Mom and Dad. It is frequently the case that parents to help their adult children with getting into a leading home. There are for two basic ways in which parents can help. Obviously, parents may get to make a gift of cash for the down payment. Alternatively, they can call upon you to live in the basement for a year while you forgo rent and accumulate a down payment. Even if you didn’t get this sort of help from your parents, you may consider helping support your children. A successful financial launch into adulthood by purchasing a home can provide tremendous stability for a family over the years.

By combining all of these strategies for reducing a down payment requirement and saving for it, the challenge may appear less problematic. Rather than needing $12,500, you may go out by with just $7,500 or so. Selling a car, saving on rent, borrowing from the 401k may quickly serve to provide you with the down payment on your first home.