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 on your new home is likely the biggest single cash expenditure you'll ever make. What most folks don't know is that you probably have access to down payment resources at your disposal, hidden in plain sight.
Here's a map to this hidden treasure – a handful of frequently-overlooked sources of down payment funds.
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 $5000 a year!) that you can save by simply bringing these things from home. The same idea applies to the $100/month cable bill, the $20 yoga class, the $2,000 vacation and so on.
Redirecting the dollars you would normally spend for some of these big-ticket items back into your down payment savings account is like pressing fast forward on your home buying timeline.
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 for your down payment. If you're really serious about home buying, put everything on the table.
Things buyers-to-be often sell 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 smart phones, etc.).
Don't underestimate the amount of cash you can bring in from the things you already own.
Your skills and time.
Another way to generate a down payment is to spend your off-time, your evenings and weekends leveraging your professional skills or personal hobbies to bring in some extra cash. Using your skills to bring in more income is a power-packed way to open the financial floodgates.
Consider starting out 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.
Your parents, family and friends.
Many home buyers get by with a little help from their friends (and relatives). Most mortgage programs will 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 you have a parent, sibling or aunt who has mentioned their interest in giving you this sort of gift it is important to bring the subject up, express your gratitude and let them know that you're planning to buy soon. You'll want to have a detailed conversation about logistics and go over everything from timelines to tax obligations.
Check in with your lender about how much of your down payment needs you can satisfy with gift money – guidelines vary widely based on how much of your own cash you have to put down and what loan programs you're applying for. Lenders almost always require that gift money be contributed along with a gift letter that states that the giver is a relative and that the money is a gift, not a loan. The lender may also need to see a bank account statement from the giver showing that the money was theirs to give – just to be sure they didn't go out and get some sort of loan that they expect you to help them repay.
Some retirement accounts allow you to borrow against or pull out funds, penalty-free, to apply them toward your down payment on a home. For some buyers, it may make sense to get your down payment up to 20% by borrowing a few thousand dollars from yourself. Obviously your specific circumstances will determine if it is advisable for you to tap into your 401K or IRA and plug that cash into a house. This is a highly personal decision that must be made strategically.
We have strong working relationships with some of the top lenders in Austin, and we're happy to share our contacts with you. If you'd like to discuss the next steps to buying a home, pick our brain about our lender connections, or discuss how to save up for your home purchase, just give us a shout. We're happy to meet over coffee -- our treat.