4 ways to put down a down payment on a house when you haven’t saved much
Mortgage eligibility is a barrier to home ownership, but often the most difficult barrier is down payment. While you don’t necessarily have to pay the standard 20%, you’ll still need to make a down payment to buy a home in most cases.
If you think you haven’t saved enough to put down a down payment on a home, there may be an alternative. Here are some creative ways to find a down payment when you don’t have enough money saved.
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1. Down payment assistance programs
There are hundreds of down payment assistance programs for people who are ready to take out a mortgage but cannot afford the down payment. These programs usually offer grants to cover some or all of your down payment, but you must qualify and apply.
For example, the HOME Foundation’s Home Buyers Assistance Grant in Oregon gives qualifying homebuyers $ 1,000 to use for 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 an emergency loans that can be canceled (in other words, you don’t have to pay it back) if you meet certain conditions. Down payment assistance programs are generally run by the state, so do your research on what’s available in the state where you are considering purchasing.
2. Programs for first-time home buyers
There are also many first-time home buyers programs that allow you to put down as little as 3.5% or even 0%, and you can often qualify until you own a home. over the past three years. The most common are FHA loans, USDA loans, and VA loans.
- 3.5% down payment with a credit score of 580 or better
- 10% down payment with a credit score of 500 to 579
- Requires mortgage insurance
- No down payment
- Must be low income and buy in a qualifying rural community
- Requires mortgage insurance
- No down payment
- Must be a CAF member or eligible veteran
- Must pay one-time VA financing fee of 1.4% to 3.6% of loan amount
3. 401 (k) loans
If you have a 401 (k), you may be able to take out a 401 (k) loan to cover your down payment, but be sure to weigh the pros and cons before doing so. Taking out this type of loan is not the same as borrowing against your 401 (k), and in fact, it’s 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 everything – you pay yourself back all that money by putting it back into your 401 (k).
- Because you are borrowing with your own money, there is no credit requirement.
- Although you are making interest payments on the loan, that money is going back into your 401 (k), so it’s better than getting a personal loan and paying interest to a lender.
- Typically, refunds are automatically deducted from your paycheck, so you don’t have to worry about forgetting to make a payment or falling behind.
- You lose the growth that your money could achieve when it is invested, which could seriously damage your retirement funds.
- If you quit your job, change jobs, or get laid off, you may have to pay off the entire loan or risk default.
- If you default, your remaining balance will be considered an early distribution and you will be taxed accordingly. It’s not as bad as defaulting on a traditional loan because it won’t hurt your credit, but it’s still worth considering.
4. Deposit gift
No one likes to ask for money, but if you have friends or family who are willing to offer you a down payment, this could be just what you need to secure your first home. There are certain rules about down payment gifts regarding who can give and receive them – and how much you can receive. Plus, you’ll still need to prove to your lender that you can afford the mortgage, and they’ll want to verify that it’s a gift, not a loan. Depending on your type of loan, there may be other rules.
If you’ve exhausted your down payment assistance options and still can’t find the cash you need, it might be time to reconsider whether you’re ready to buy a home. It’s always better to wait and save some money than to commit financially before you’re really ready.
Once you’re ready to buy a home, these methods of reducing your down payment liability can make home ownership more accessible and leave you with extra cash for things like furniture and an emergency fund.