Hidden Sources for Your Down Payment: How to Maximize Your Home Buying Funds
Whether you are planning to put down a full 20 percent or pulling together the cash for a 3.5 percent down payment for an FHA loan, your down payment might be the biggest single cash expenditure you ever make. Some scrimp and save for years, while others can ready the cash with less difficulty, but no buyer in the history of home buying has ever said they have too much down payment money.
Here's an insider secret: many buyers have a treasure trove of down payment resources at their disposal, hidden in plain sight. Here's a map to this hidden treasure – a handful of frequently overlooked sources of down payment funds.
1. Your Budget's Biggest Line Items
Home buying is one of those push-meet-shove-type situations. If you're serious about coming up with your down payment funds, sit down and backtrack over your monthly budget or your last month's checking account statements. Isolate your top 10 budgetary line items and do an internal gut check on whether there is anything on this list that you can slash or eliminate.
If you spend $5 a workday on a bagel and coffee at breakfast and another $15 on your takeout lunch, that's $400 per month – almost $5,000 a year – you can save by simply bringing these things from home (not to mention the health and other benefits you'll gain). And those numbers are not inflated if you work in a big city. Nor is the $100/month cable bill, the $20 yoga class, the $2,000 vacation, or the premium pricing you might be paying for cell service.
Redirecting the dollars you would normally spend on some of these big-ticket items back into your down payment savings account is like pressing fast forward on your home buying timeline.
2. Your Stuff
When you need to save money, there are really only two levers you can pull: you can spend less, or you can make more. Selling stuff you already own and don't actually use is a relatively painless way to make more money to go toward your down payment. If you're really serious about home buying, put everything on the table.
Things buyers-to-be often sell (usually online) include:
- RVs, cars, and motorcycles
- Designer clothes, costumes, shoes, and handbags
- Underutilized hobby-related gear (bikes, boats, and snowboards)
- Furniture and antiques
- Electronics, books, and CDs (think: TVs, computers, old smartphones, etc.)
Don't underestimate the amount of cash you can bring in from the things you already own.
3. Your Skills and Time
One way to make more money is to sell off the stuff you have lying around; the other is to get to work! Spend your off-time, evenings, and weekends leveraging your professional skills or personal hobbies to bring in extra cash.
Once you get serious about coming up with your down payment cash and decide to be creative about where to find that money, using your skills and time creatively is a power-packed way to open the financial floodgates.
Consider starting with a simple email to your circle of acquaintances outlining your skills and what kind of work you'd like to pick up. You can also list your potential services on a site like TaskRabbit. If you are crafty, you might let your new felting hobby stock the virtual shelves of your shop on Etsy. Even if you aren't "creative," think creatively about what you might do to earn a little extra cash. One acquaintance earned thousands of dollars dog sitting while working from home. You'll be surprised by how much you can earn hawking wares on the side or with small business projects like research, bookkeeping, or office organizing.
4. Your Parents, Family, and Friends
Many home buyers get by with a little help from friends and relatives. Most mortgage programs allow for some portion of your down payment to come in the form of 'gift money,' which is exactly what it sounds like: money someone gives you to help you buy a home.
The best-case scenario is to have some idea of what sort of gift money you can count on as far in advance as possible, as it will impact your own savings targets and your lender's documentation requirements. If a parent, sibling, or aunt has expressed interest in giving this sort of gift, bring the subject up, express your gratitude, and let them know you plan to buy soon. Have a detailed conversation about logistics, timelines, and tax obligations.
Check in with your mortgage professional about how much of your down payment needs you can satisfy with gift money – guidelines vary widely depending on your cash contribution and loan program. Lenders almost always require a gift letter stating that the money is a gift from a relative, not a loan. They may also require a bank statement from the giver showing that the money was theirs to give, ensuring it wasn’t borrowed.
5. Your Assets
Some retirement accounts allow you to borrow against or withdraw funds, sometimes penalty-free, to apply toward your down payment on a home. Whether tapping into your 401(k) or IRA makes sense depends on your personal financial situation.
For some buyers, borrowing a few thousand dollars from retirement accounts to reach a 20 percent down payment can reduce mortgage interest rates while allowing repayment to your own account with interest, rather than to the lender. This is a highly personal decision that must be made strategically, but exploring retirement accounts as a source of down payment funds is worth considering.
