How First-Time Homebuyers Can Leap the Down Payment Hurdle

Saving for a sufficient down payment is a significant barrier for many would-be homebuyers, particularly those looking to transition from renting to owning. According to a recent Zillow Housing Aspirations Report (ZHAR), more than two-thirds of renters nationwide consider setting aside money for a down payment to be their biggest obstacle to buying a home. It can be challenging to try to save money when a large portion of your income is already allotted to paying the rent. Add to that a bustling housing market, rising home prices, and increasing interest rates that all drive up the amount of money today’s buyers need for a down payment.

Regardless of the challenge it can present, plenty of first-time buyers are managing to acquire enough money to fund their down payment. Let’s take a look at some of the many ways you can make your dream of home ownership a reality.

Start saving now. It takes some discipline to save enough for a down payment, but it can be done. Cut back on excesses such as dining out, new clothes, and travel. Save raises, bonuses, and tax refunds rather than spending them.  Use cash rewards credit cards to get cash back on purchases and put the rebates into savings.  Have you paid off your car? Resist the urge to buy a new one and save the monthly payment. If you have an auto loan, consider refinancing it to lower your payments.  You may want to open a separate savings account just for your down payment to help reduce the temptation of using the funds for something else.

Carefully research your loan options.  If you’re a first-time home buyer, the down payment hurdle you have to clear may be quite a bit lower than you think. Traditionally, lenders have preferred 20% down, but a lot of low down payment options are available, especially to first-time buyers. You may not need to save for a down payment at all if you’re a U.S. military veteran, service member, or resident of certain rural areas. The Department of Veterans Affairs and the U.S. Department of Agriculture have zero-down payment loan programs for qualified borrowers. If your credit is less-than-perfect, you might be able to qualify for a loan backed by the Federal Housing Administration (FHA). The FHA’s program requires just 3.5 percent down, but borrowers must refinance once their equity grows above 20 per cent in order to avoid paying Private Mortgage Insurance (PMI). Conventional loans, which aren’t backed by the government, also offer low down payment programs to first-time buyers. Down payments of just 3% are common, and some lenders even offer 0% down loans. Keep in mind that a lower down payment usually means you’ll pay a higher interest rate.

Enlist the help of your family. A quarter of first-time homebuyers in 2016 used gift money from relatives to round out their down payment, according to the National Association of Realtors.  Gifts up to an annual exclusion ($14,000 per person per year for tax year 2017) can be given without the need to file a gift tax return. So for example, your mother and father could give you and your spouse a total of $56,000 annually without having to file a gift tax return. Be advised that receiving a gift toward a down payment takes a “full circle” of documentation to satisfy the mortgage lender’s requirements. The donor will be required to provide bank statements as proof of their ability to pay, along with a letter confirming that the donation is a gift and not a loan.

Many people prefer to ask their loved ones for a loan rather than an outright gift. Of course, you’ll have to repay the money someday, and your bank or institutional lender will factor this addition into your debt burden and their decision as to whether to loan you money.

When it comes to your down payment, it‘s preferable not to rely solely on the kindness of your friends and family. A lender may refuse to approve a loan where the entire down payment comes from gifts.  Borrowers who have none of their own money in the transaction have been found to be more likely to default on their loans.

Tap into your retirement accounts. If you have a retirement nest egg, you might consider using a portion of it to help with your down payment. Employer-sponsored 401(k) plans often allow for penalty-free hardship withdrawals or loans. But if you’re under 59½, you’ll pay income taxes and a 10% penalty on the withdrawal. IRA withdrawals for home purchases up to $10,000 are allowed but will trigger income taxes. Roth IRA withdrawals are tax-free and without penalty if you’ve had the account for at least five years. Keep in mind that wiehdrawing money from your 401(k) or IRA accounts will mean your retirement savings will grow less swiftly.

Get creative. Borrowers with low or moderate income, and teachers, firefighters or other public service job holders may also qualify for down payment assistance through thousands of federal, state or local programs aimed at helping homebuyers.

Saving for a down payment to buy a house can seem overwhelming.  Break down your overall plan into smaller actions, employ some innovative tactics, and you’ll be able to make the down payment on your dream home sooner than you expected.

Certified Title is a Title Insurance, Search and Settlement Services provider that uses the latest technology to make managing documents, communicating and closing transactions a breeze. To learn more, visit Certified Title today or call (888) 486-5511.