September 19, 2021

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4 Ways to Make a Down Payment on a House When You Don’t Have Much Saved

Qualification for a mortgage is a hurdle for home ownership, but often the biggest hurdle is the down payment. While you don’t necessarily have to cut the usual 20%, in most cases you will need to pay a down payment to buy a home.

If you think you haven’t saved enough to pay a down payment on a home, there may be an alternative. Here are a few creative ways to get one deposit if you haven’t saved enough money.

1. Advance payment support programs

There are hundreds of down payment support programs out there for people willing to take out a mortgage but unable to afford the down payment. These programs usually offer grants to cover part or all of the down payment, but you must qualify and apply for it.

For example, the HOME Foundation Buyers Assistance Grant in Oregon offers eligible homebuyers $ 1,000 to use towards a down payment. The Arkansas Dream Down Payment Initiative offers low-income people up to $ 10,000 to cover a down payment in the form of a loan that can be extended (i.e. not repaid) if certain requirements are met. Advance payment support programs are usually state owned, so do your research to find out what’s on sale in the state you plan to buy from.

2. Programs for first-time home buyers

There are also many Programs for first-time home buyers with this you can only deposit 3.5% or even 0%, and you can often qualify as long as you haven’t owned a home in the past three years. The most common ones are FHA loans, USDA loans, and VA loans.

FHA loans:

  • 3.5% down payment with a credit score of 580 or higher
  • 10% deposit with a credit score of 500-579
  • Requires mortgage insurance

USDA loan:

  • Zero deposit
  • Must have a lower income and shop in a qualified rural community
  • Requires mortgage insurance

VA loan:

  • Zero deposit
  • Must be an Eligible Service Member or Veteran
  • Must pay a one-time VA financing fee of 1.4% to 3.6% of the loan amount

3. 401 (k) Loans

If you have a 401 (k) you possibly can take out a 401 (k) loan to cover your deposit, but weigh the pros and cons beforehand. Taking out this type of loan is not the same as taking out a loan from your 401 (k), and in fact, it is not the same as a loan. When you take out a loan on your 401 (k), you are borrowing money from yourself. When you pay it back – interest and all – you are paying all that money back to yourself by putting it back in your 401 (k).

Advantages:

  • Since you are borrowing from your own money, there are no credit requirements.
  • As you make interest payments on the loan, that money goes back into your 401 (k). So it is better than taking out a personal loan and paying interest to a lender.
  • Usually, repayments are automatically deducted from your paycheck so you don’t have to worry about forgetting or defaulting on a payment.

Disadvantage:

  • You are losing the growth your money could make while investing and it could take a heavy toll on your retirement savings.
  • If you quit your job, change jobs, or are laid off, you may have to pay back the entire loan or risk defaulting.
  • In the event of default in payment, your remaining balance will be regarded as an early distribution and taxed accordingly. This isn’t as bad as a traditional loan default in that it doesn’t affect your creditworthiness, but it’s still worth considering.

4. Down payment gift

Nobody likes to ask for money, but what if you have friends or family willing to give you some money? Deposit gift, it might be just what you need to secure your first home. There are some rules about down payment gifts in terms of who can give and receive them – and how much you can receive. Also, you still have to prove to your lender that you can afford the mortgage and they will want to make sure that it is a gift, not a loan. Different rules may apply depending on your type of credit.

If you’ve exhausted your options for down payment assistance and still unable to raise the money you need, it may be time to reconsider whether you are ready to buy a home. It is always better to wait and save money as a financial commitment before you are really prepared.

Once you’re ready to buy a home, these methods of reducing your down payment responsibility can make it easier for you to become a homeowner and give you extra cash for things like furniture and an emergency fund.