Down Payments

A down payment is an initial, upfront payment made when something is bought on credit. In the case of a mortgage, some lenders don’t require down payments, while others have minimum requirements. Saving for a down payment takes time and discipline, but the payoffs of homeownership make it worth it. A conversation with your loan officer can help determine how much of a down payment you need based on several factors, including:

Purchase price. The more expensive the home, the higher the down payment may need to be. Some loans require buyers to put down 5% of the home’s purchase price; others may require as much as 20%. As an example, 5% of a $150,000 home is $7,500; 5% of a $300,000 home is $15,000. Some loans don’t require a down payment.

Desired interest rate. If you’re able to put more down upfront, it could generate a lower interest rate. Make sure you don’t overextend yourself, though, and thoroughly consider just how much you can safely put down. 

Desired monthly payment. When you put more money down toward the purchase price, you’ll reduce the amount of money you have to borrow. This, in turn, makes your monthly payments smaller. Paying only 5% of a home’s purchase price will result in higher monthly mortgage payments than if you put down 20%. 

Loan type. Different loans come with different down payment requirements. With VA loans, qualified homebuyers may not need to make a down payment, but for FHA loans, borrowers need to put down at least 3.5%. 

Savings Strategies

Once you’ve determined how much you’ll put down, it’s time to begin saving. Start with these strategies:

Maintain a dedicated savings account. It’s easier to track your progress when you separate your savings for a down payment from other funds. Plus, you’ll be less tempted to dip into those funds to cover everyday expenses. To make it easier to save, have a set amount automatically deposited into this account with every paycheck you receive.

Grow your money. As your savings grow, consider transferring the funds into an interest-earning Money Market Savings Account (MMSA) or a Certificate of Deposit (CD). Just make sure the terms fit your timeframe for making a house purchase. Sometimes there are penalties for early withdrawals.

Find new ways to save. Review your budget monthly for excess expenses. For instance, reduce spending on leisure activities such as eating out, concerts and vacations. You can also cut expenses by negotiating lower rates for any insurance policies (auto, renter’s, etc.), cable and cellphone plans. Then put the saved money into your dedicated savings account.

Refinance your debt. Take a look at what you owe to see if you can reduce how much interest you’re paying. You may be able to get a different student loan repayment plan and scale back your monthly payments. Consider reducing credit card debt by opting for a balance transfer to a card that charges a lower interest rate. You can even refinance your car loan to a different lender that offers better rates.

Tap into existing savings. While it’s rarely a good idea to take money out of retirement, first-time homebuyers can use up to $10,000 from individual retirement accounts (IRAs) for the purchase of a home penalty-free, thanks to the 1997 Taxpayer Relief Act. See your tax advisor for details. You still have to pay income taxes on the money you take out, though, and you’ll want to replenish your retirement funds as soon as possible.

Financial Gifts

Sometimes family members may donate or gift money to help you with a down payment. Here is what you need to know and do when using a gift of cash for a down payment:

Write a gift letter. This letter should include the amount of the gift, the relationship of the donor to the recipient, the address of the home being purchased and a statement that specifies that the gift isn’t a loan and won’t be repaid. Both the donor and recipient should sign and date the letter and include their contact information. The lender will want to see this letter when considering your loan application.

Keep taxes in mind. You can receive gifts from more than one donor, but there are limits. The federal government determines how much an individual donor can gift without incurring any tax consequences for the donor or the recipient. Make sure you know how much you can accept.

Be prepared to make your own monetary contribution. Depending on your loan type, you may have to contribute money from your personal funds. For instance:

If you put down less than 20% on a conventional loan, part of the down payment must come from your own funds. This amount varies by loan type. If you put down 20% or more on a conventional loan, all of your down payment can be gift money.

For FHA and VA loans, all of your down payment can be gift money. However, for some lenders, if your credit score is between 580 and 619, at least 3.5% of your down payment must be your own money.

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