By Marcie Geffner, The Lending Tree
It’s a common misconception that buyers need to save up a lot of money to purchase a home. In fact, it’s possible to buy a home with a very modest sum for a down payment and closing costs.
The down payment is often the most daunting aspect of the process for first-time home buyers. Repeat buyers usually are less concerned about putting money down because they can use the equity they have in their current home to buy their next home.
Buyers often believe they must save up 20 percent of a home’s purchase price. But that’s not true. In fact, it’s just as easy to buy a home with only 10 percent, 5 percent or even 3.5 percent of the home’s purchase price. Active-duty military servicepersons, veterans, and certain other borrowers who are eligible for a VA loan, guaranteed by the U.S. Department of Veterans Affairs, can buy with no down payment at all.
Still, even 3.5 percent isn’t zero, and with the exception of VA-eligible buyers most others must figure out some way to get a down payment.
Here are five suggestions:
1) Get a gift. The easiest way to get a down payment to buy a house is to get a gift from your parents or other family members. Gift funds can be used for a down payment as long as the money is a true gift, not a loan, and you can produce documentation that shows where you got the money and that it is yours.
2) Tap your retirement account. Some types of retirement accounts allow you to withdraw funds without a penalty if you meet certain requirements and use the money to buy a home. Consult a tax adviser before you make the withdrawal to make sure your account has this feature and you understand the rules.
3) Apply for down payment assistance. Most states and many cities and towns have government programs to help people purchase a home. Again, there are rules. Some programs are only for people who haven’t owned a home in the last three years. Others are limited to certain geographic areas, and still others are restricted to people who meet low income guidelines. Research these programs to find out whether you qualify.
4) Pay off your credit cards. It might seem surprising, but paying off debts can free up a lot of money each month that you can reallocate to saving for a home instead of paying interest. Pay off the highest rate or lowest balance first, and then continue to work through the debts until you’re free and clear. Lowering your minimum monthly payments can help you qualify for a mortgage, too.
5) Boost your income. Whether it’s a second job, pay raise, side gig, or fatter commission, an increase in your monthly income is great way to set aside savings to buy a home. Rather than spend the extra money, open a savings account dedicated to your down payment and start socking away the savings.