If you’re a buyer right now, saving up for the pre-closing expenses (ie. due diligence money, earnest money, inspections, etc.) along with the actual closing expenses (the down payment for the loan, attorney fees, homeowner's insurance fees, etc.), can be a bit overwhelming. However, there are some great ways you may not have considered to get your down payment collected.
In our market, the Raleigh Durham area, a down payment for a conventional loan can be as little as 3% down, so that would mean you would need as little as $10,500 for a down payment with a purchase of a $350,000 home. Here is a useful guide on 4 ways--from the obvious to lesser known ways you may not have considered.
1. Have a No-Spend Month or three!
Probably the least attractive option, but as you might have experienced from 2020 lockdowns, most of us began 2021 with a little more money in our pockets, because we were not spending on frivolous purchases as much. We made coffee at home instead of going to the local coffee shop. We did Zoom dates instead of at fancy restaurants. And all those savings added up. And even though restrictions are being lifted in some areas, we can still apply those same restrictions on our own wallets today for benefit tomorrow.
- Tip 1: The next time you find yourself considering an impulse buy, stop yourself and think about it for 30 days. If you still want to make that purchase after those 30 days, go for it. This rule works because by forcing yourself to wait on all your non-essentials, you remove the emotions from your spendings and these little changes can add up.
- Tip 2: Ask your payroll manager to remove 5-10% or even a flat amount like $250 to be deducted from your check automatically into a savings account. This works for most people because it's the no-thought option and you can the savings you need without worrying about managing the process. The catch though is that you can't touch it.
2. Receive a gift from your parents or grandparents--up to $60,000 tax-free!
A gift is just that, a present with no strings attached. It’s not a loan at all or even considered income. And you do not have to pay back anyone. Ever. And, yep, you and your spouse could get up to $56,000 in one year. That could be a nice down payment.
However, you and your parents or other family members still need to follow some guidelines to avoid any tax implications and still meet lender requirements. Of course, check with your own accountant to double-check your specific tax implications, as of 2021:
Parents can each give up to $15,000 to a child and another $15,000 each to their child’s spouse per year without facing a gift tax. That’s a total of $30,000 per person or $60,000 total per year for a couple.
If the gift is recent and is for the sole purpose of buying a home, a lender needs to see a signed agreement, aka "a gift letter" from parents stating that they have given their child a specific amount of money as a gift and don’t expect repayment.
Typically a lender wants the buyer to prove the origin of this new lump sum of money, and this "gift letter" assures them that you are under no obligation to pay back this gift. Parents or family members can even send the money directly to the closing attorney. As long as that amount matches the amount stated in the letter and the giver can also prove the origin of the gift, if asked, then this is a great option. Many family members who lend money this way are happy to know that they are helping you buy a home and have some control over where the money is going.
I’m not a licensed account, so be sure to check with yours about what the tax implications might be for you and your family.
3. Tap into your 401K
Getting a 401k loan is one way to get additional money toward a down payment. It’s a lump sum of money that is already yours -- not the bank’s! You’ll need to double check to see if your particular 401k plan offers a loan option, but here is some key information on typical 401k loans:
You can get up to 50% of your vested account balance can be borrowed, with a maximum of $50,000
- You usually have to be currently employed by the sponsoring employer of your plan.
You'll likely get a lower interest rate than standard loans
- You’ll be paying yourself that interest (along with the principal) back into your account, not the bank. However, interest payments aren’t tax deductible, so that’s one cost of borrowing from your account. And, you won’t be earning any interest on the money that’s no longer in your account.
You'll likely have up to 5 years for full repayment
- Yes, you’ll need to repay back this loan to yourself. Can be automatically deducted from your paycheck monthly into your 401k account.
You'll want to avoid a 10% penalty
- If you leave your job before repayment, you will only have a 60-to-90- day time period to pay the loan back in full. So try not to change jobs during the repayment period.
Borrowing from your 401k plan can be a more viable option for many first-time buyers than a complete withdrawal. But always check with your tax advisor and mortgage lender to learn any specific ramifications you may face with a 401k loan. You can see if a small loan to bump up your down payment funds is worth it or not.
4. Tap into "free money" Federal and State Funded Down Payment Assistance Programs
My personal favorite and honestly, I wish I could shout this to the roof tops. The local and federal governments allocate money for qualified first time and moving up buyers to help with initial down payment and tax costs associated with buying a house. For NC, there are 2 types of options with different benefits and draw backs worth exploring.
- NC 1st Home Advantage Down Payment ($8,000)
- NC Home Advantage Mortgage (fixed-rate mortgages and down payment assistance 3% to 5% of the loan amount)
Here's the helpful guide to each option's details and qualifications.
