Buying A Home April 4, 2022

Down Payment Getting You Down?

The first step to home ownership may be easier than you think


For decades, the rule of thumb is that you need to put down a 20% down payment for a conventional home loan. While that may be true for a conventional loan, many people don’t know there are other ways to pay a smaller down payment to become a homeowner. According to Nerdwallet, here are some ways to bypass conventional loans*:

  1. FHA loans are insured by the Federal Housing Administration and allow down payments as low as 3.5%.
  2. USDA loans are guaranteed by the U.S. Department of Agriculture. They are for rural home buyers and usually require no down payment.
  3. VA loans are guaranteed by the Department of Veterans Affairs. They are for current and veteran military service members and usually require no down payment.
  4. State grants are offered in each state to help make home ownership easier. Research what’s available in your state.

So now you know what is out there beyond conventional mortgages. But you still need to get those funds. If you’ve been diligent in saving, you may already have the money in your savings account.

If not, there are ways to build up your savings by being more frugal with your living expenses. According to The Balance, other creative ways include:

  1. Increased your federal tax withholding and use that refund for your down payment.
  2. Ask your parents. Under gift tax laws each parent can gift $15,000 per person, so a married couple can get as much as $60,000 from two parents. But you have to make sure to document to the mortgage lender that the money is a gift and not a loan. This is especially true if you are aiming for an FHA loan. HUD also has strict rules about who can gift you the money.
  3. Ask the seller to cover the down payment. Some sellers are willing to do this and cover closing costs, rolling them into the loan. All you have to do is ask.
  4. Tap into your 401K. You can get the money under hardship rules but as Investopedia points out, the cons are tremendous.
  • You owe income tax on the withdrawal.
  • The withdrawal could move you to a higher tax bracket.
  • If you are younger than 59½, you also owe a 10% penalty on the money you withdraw.
  • You can never repay your account and lose years of tax-free earnings on the money you withdraw.

Sit down with a trusted advisor-your agent or a mortgage lender to find out what works for you. The more information you have, the better prepared you’ll be to take that first step toward home ownership.