How Much Do You Need?
First things first, how much of a down payment do you need? This will depend on what type of loan that you are seeking. Let’s Take a look at the most commonly utilized loans. Later, we will show you how to get money fast with some proven ways to find down payment money.
With a VA Loan, no down payment is required at all. If you meet the qualifications, this makes it a very attractive loan. Most people who use a VA Loan will put zero money down but if you put down at least 5%, you start seeing some perks. There is a funding fee of 2.15% of the loan value on a VA loan. Put down 5% and that fee goes down to 1.5% of the loan. That is a savings of $1300 on a $200,000 loan. So, in this case, put down $10,000 and you save $1300 on a $200,000 home loan.
Like a VA Loan, a USDA home loan requires no down payment. To qualify for this type of loan, you have to meet income requirements and location requirements. These loans are for those of modest income who plan to by a home in what the government considers a rural area. Don’t worry, you wont be surrounded by cows and goats, nearly 97% of the country is technically rural. Chances are that a suburb of a city you desire to live in will be considered rural.
This extremely popular loan program allows those with less than perfect credit to purchase a home with as little as 3.5% down. So, for an average mortgage of $300,000, you have a $10,500 required down payment. To qualify for an FHA loan, you should have a minimum credit score of 580 and a dent to income ratio of less than 43%. You can have a score as low as 500 and more debt and still qualify but it will be harder and more of a down payment may be required.
With a conventional loan, you will have to have much better credit than with government backed loans and most people will choose to put down 20% to avoid PMI or Private Mortgage Insurance. So, for the average $300,000 mortgage, you would need to put $60,000 down. That is a large chunk of cash to put down but it will give you the best rate without PMI which will mean the lowest payment.
Finding Your Down Payment
As you can see, there are several ways to get out of a down payment if you are a veteran or can live with a longer commute by living in a rural area. For the rest of you, a down payment of $10,500 to $60,000 would be required for a $300,000 home loan. It can be a daunting task but it is better than paying rent forever. Let’s take a look at some ways to come up with that money.
This will be the biggest part of your home journey, traditional saving. Take a portion of your net salary and place it into a savings account. How fas that savings grows will depend on how many sacrifices that you are willing to make. For the fastest results, make as many cuts in other budget areas as you can. Brown bag your lunch to work, buy a cheaper car or drive the one you have longer, cut back on entertainment, etc. There are dozens of ways to make cuts to a budget to increase your savings rate.
Borrow From Your 401K
If you have been at your job for any time and contribute to your retirement fund, you probably have a good chunk of money in your 401K. You are allowed to make a withdrawal to put towards a home purchase. The catch is that the payments that you make on your 401K loan may count against you on your home loan. It is a monthly expense that will be used in the calculations. In most cases, this will not be an issue but if your debt to income ratio is close to the limit, this might pose a problem.
Receive A Gift
Lot’s of people use financial gifts from family to come up with their down payment. Perhaps you have a rich parent parent or grandparent that wants to help you on your way to your new home. This can help but there is a small catch. Every dollar that finds its way into your bank account must be accounted for during the underwriting of your loan. You will need to get a letter from the donor stating that the money you received is a gift and not a loan. Details of the letter must include, at a minimum, the donors name, the date the money was transferred and that the money does not need to be repaid.
Pay Off High Interest Credit Cards
Okay, this is spending money elsewhere but you are probably wasting a lot of money on high interest credit cards. Pay them off first and then take the money you were wasting on monthly payments and put it into savings. As an additional benefit, you will probably increase your credit score and lower the debt to income ratio on your future loan. Very good things.
Ask The Seller
The seller can contribute to your down payment, in a round about way. In order to be able to give you down payment assistance, they must give the money to an organization who then gives the money to you. The organization will probably charge a fee for this service and it adds to the complication of a home loan but sometimes you have to do what you have to do. Barring that, you can also get the seller to directly pay a portion of your closing costs.
Have A Fire Sale
Have a no holds barred garage sale and everything must go. You don’t want to move all that stuff anyway. Sell electronics, furniture you don’t use much, jewelry, etc. I am sure you have a few thousand dollars worth of things lying around that you would gladly exchange for a new house. This is a bit extreme but sometimes you have to do whatever it takes.