How To Get A Down Payment For A Home – Eight Ways

By Subodh / January 26, 2014

The more you can afford to put towards a down payment for your home, the better your home loan terms will typically be. Given time, you can use a conservative, long-term savings plan to amass the cash for a good down payment to get the home of your dreams. But if you don’t have several years to save, try some of these strategies to get a down payment together.

1. Make a basic savings plan

The most effective, reliable strategy is probably the least glamorous. Once you know how long you have and how much you want to save, you can make a simple monthly plan. For example, if you want to buy a $250,000 home in 20 months and need 15% down, you need to save $37,500, which works out to $1,875 a month. But saving nearly $2,000 a month can be challenging unless you have someone else to house you and feed you. This is a good time to realistically calculate how much you can come up with for a down payment, the mortgage payment you can afford and what you really need in your new home. Obviously, if your new home price drops, so does your needed down payment.

2. Find a better place to keep your money

Finance Foundation RepairAt the very least, you need a dedicated down payment savings account. Many banks offer money market savings accounts with higher interest rates for higher balances. Additionally, online financial institutions often offer higher savings interest rates because they do not have brick and mortar expenses. Investigate your options and make sure any account you choose isn’t linked to a debit card or credit card.

Certificates of Deposits (CDs) outperform savings accounts if you know you can leave the money untouched for a period of time. Usually you can get CDs for six months, a year, two years, three years and five years. The longer the CD term is, the higher the interest rate. So, you will be rewarded for planning ahead.

3. Sell luxury items and eliminate luxury expenses

If you have a nice car, expensive designer clothes, a membership to an expensive gym, or any other non-essential goods, sell or cancel them. This includes downgrading your brand new phone and service plan, cutting-edge gaming equipment, top-of-the-line audio equipment and anything else that taps your income.

4. Move to a smaller place or get a roommate

Moving to a smaller house or apartment cuts your rent and supplemental expenses. A smaller place typically has lower heating and cooling costs and electricity usage. Plus, you will be more likely to dine at your friends’ homes rather than entertaining at yours, which is expensive.

If you have an extra bedroom in your house or apartment and don’t want to move, you might rent the extra room for a year to make money. (If you are renting, make sure your lease allows this or comply with the lease terms for having a roommate.) You can have the roommate split utilities as well as pay rent.

5. Sock away any windfalls

Sometimes you get a sudden influx of cash, whether from your federal tax returns, a pay raise, mileage checks from an employer when you drive for work, or inheritance. As tempting as it is to use some of this money for rewards, try to put all of it into the down payment fund. Further, if you get a raise, continue to live as if nothing had changed. Immediately deposit the entirety of the raise into your down payment fund.

If you have lots of money on credit cards however, you may be better served by paying the balance on cards. Then, put the interest you were paying every month into your down payment fund. This not only cuts your overhead, it improves your credit by creating higher available balances. (Leave the credit lines open – and don’t charge anymore!)

6. Stop investing and saving for retirement

If you are investing in a Roth IRA or 401(K) for your retirement, you can put that on hold and divert all that cash to your down payment savings. This is a temporary change that may not make sense for everyone. If your company matches your investment, you could loose money with this strategy. However, if your company matches 3 percent and you invest 10 percent, you might consider reducing your investment for a short time.

7. Borrow from friends or relatives

If you have relatives or friends with available cash, you can ask them for a loan (or a gift) to help you cover the down payment. Individual private loans can be a great financial opportunity, but be careful not to tax your personal relationships with the subject of money.

It will help to have a plan before you broach the subject: know how much you’d like to borrow, how long it will take you to pay it back and how much interest you are willing to pay. Your relative may offer more money, more time, or a lower rate (or no interest), yet it is best to have a plan. Once you agree on the terms, make sure to put them in writing and have both parties sign in agreement.

8. Work with the home seller

It’s possible to get your seller to help cover closing costs and other fees associated with completing a home purchase and home loan. Indirectly, this fee relief frees up other cash that you can then put towards your down payment. You can’t plan ahead for this very well, except by working with a real estate agent who will encourage sellers to cover closing costs.

It’s also worth remembering that although many banks prefer a down payment of roughly 20%, it is not always a requirement. You can get conventional loans with down payments as low as 10% without paying a big price. You may also qualify for a Federal Housing Administration (FHA) loan that requires as 3.5 percent down or a United States Department of Agriculture (USDA) loan with no down payment.

When you start looking for a home and a home lender, investigate your borrowing options. A good lender or mortgage broker will help you explore all of your possibilities – including mortgages with low down payments.