Having to come up with a huge down payment to buy a house can be stop you right in your tracks if you’re considering home ownership.
Years before I seriously considered buying my first condo, I had heard that a 20 percent down payment was the norm. I couldn’t imagine having that much money set aside as a down payment. Regrettably, I didn’t buy as soon as I wish I did, and kept living in apartments for a few more years as I tried to save for a down payment.
The down payment requirements aren’t as strict as you might think, however, with banks offering home loans for as little as 3 percent down if you have good credit.
Fewer people are buying homes, whether because they can’t afford it or because it’s cheaper to be a renter. Home ownership rates in 2014 dropped to a 20-year low, with 64.5 percent of Americans owning a home — down from 69 percent a decade earlier, according to the U.S. Census Bureau.
If you want to someday avoid paying rent by owning a home outright, then owning a home is the way to go. But even if you can’t come up with a down payment, there are still ways to buy a home. You just have to be a little creative and willing to take a few more risks.
Here are six ways to either buy a home outright by coming up with the total cost, or finding a reasonable down payment that doesn’t require years of saving for your first home:
1. Soak your retirement account
This may not be an especially appealing way to buy a home, but it’s possible if you’re willing to pay a 10 percent penalty on the retirement account withdrawal and pay taxes on it. If you’re under 59.5 years old, you can pull money out of a 401(k) to buy a home, but you’ll have to pay fees and taxes that you wouldn’t if you were of retirement age.
A Roth IRA might be easier to take money out of because it’s an after-tax account and you’re only taxed on earnings.
You can also borrow money against your retirement account to make a down payment on a house, though if you lose your job the money will have to be repaid within 60 days.
2. Have a low-budget wedding
With the average wedding costing $20,000, some couples are opting to skip the expensive wedding and put the money toward a down payment on a house.
In a survey by ERA Real Estate, nearly 60 percent of women in a survey were willing to give up a honeymoon for a down payment.
It’s at least a conversation worth having as a new couple.
3. Parental loan for down payment
Your parents may be kind enough to offer you a home down payment as a gift. But don’t do it because it would be subject to the gift tax.
Instead, have a lawyer write up a promissory note and sign a contract. Like pulling money out of a retirement account, this option may not be so easy to do, especially if you don’t like seeing your parents at Thanksgiving when you haven’t made the monthly loan repayment to them in a few months.
4. Borrow against your life insurance
A whole or variable life insurance policy may allow you to borrow against the principal, without having to repay the loan. This will mean less money for your heirs when you die, however.
You’re basically borrowing money from yourself. Some lenders may only allow you to borrow up to a certain percentage of the cash value you have in the policy.
5. Rent to own
If the house you’re renting is for sale, or could be, offer the owner some extra monthly rent money that would go toward credit for buying the home eventually.
This option may require a larger down payment to give the landlord — which could be done with some of the steps above — but it would allow you to remain a renter for awhile longer while building equity in a home you’re going to buy in a year or so.
Or pay more than the purchase price of the home, essentially getting an interest-free loan for a year while you live in the house as a renter. The rental money for the coming year could be added up as a down payment.
6. Co-signer for a home loan
If your parents don’t want to loan you money for a down payment, ask them to co-sign on the loan.
It can make you a better loan risk and won’t require as good of a credit score to get a home loan. The downside is that your parents are also responsible for the loan, so if you don’t make mortgage payments, it would hurt their credit.
Those are some ways to either avoid a down payment or make it easier to get if you haven’t saved for it. What down payment options have you used?
We are currently trying to save as much as we realistically can for our next home down payment. Hopefully our current house sells quickly so that we can start padding our fund more!
That’s always the difficult timeline to deal with: Selling one house while buying another. Thankfully, real estate agents can help by making a purchase conditional on a sale, but it’s still a headache. Good luck!
Great suggestions! We are nowhere near buying a home and are happily renting for the time being, but one of my goals this year is to start slowly saving for a down payment.
The down payment is the first big bill that hits you in the face as a home buyer, but soon there will be others that I didn’t get to in this story: property taxes, homeowners’ insurance, maintenance and more fun down the road. But at least there are tax deductions for mortgage interest, and hopefully gaining equity.
Rent to own is very widely known here in our country. House down payment is one major problem when you want to purchase a house, that’s why there are lots of companies that offered that kind of agreement.
I guess if you have a contract, rent to own can work. With rent to own businesses in the U.S., I’m wary of the high interest rates they charge. But with a house, it’s probably easier.
You have brought up a really fantastic point. Thank you for sharing your article about these 6 Ways to Come Up With Down Payment for a House. Great!
Thanks for the comment. I hope it helps you figure out how to come up with a down payment.