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If a home purchase is in your future, now is the time to start saving for the 20 percent down payment you probably need.
Of course, you can buy a home with less than 20 percent down. The Federal Housing Administration has lowered down-payment requirements for mortgages it insures to as low as 3.5 percent to make it easier for buyers to get into the market.
But if you contribute less than 20 percent down on a home purchase, you’ll be required to buy private mortgage insurance, or PMI. PMI protects the lender from the chance you’ll fail to make your payments.
Conventional mortgages require PMI. According to Investopedia:
Private mortgage insurance typically costs between 0.5 percent to 1 percent of the entire loan amount on an annual basis. On a $100,000 loan this means the homeowner could be paying as much as $1,000 a year, or $83.33 per month — assuming a 1 percent PMI fee.
With a Federal Housing Administration (FHA) mortgage, the insurance is called a mortgage insurance premium (MIP). Click here to see the FHA’s costs and requirements.
So, you can understand why it pays to save up at least 20 percent of the purchase price before taking out a mortgage. Here are 10 ways to get that down-payment money:
1. Look into down payment assistance programs
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You might be surprised how many programs exist to help buyers — especially first-time homebuyers. One way to find such programs is through Down Payment Resource, which calls itself “a Web-based software company with a mission to connect people with hard-to-find financial resources.”
The site takes some basic information from you and delivers a list of programs for which you may be eligible, as well as contact information for participating lenders in your area.
2. Set up a dedicated account
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Get going by setting up a savings account that pays the most interest possible. If you’ll be tempted to divert the money to other needs, set up an account solely for the down payment. Comparison shop for the best savings account rates in our Solutions Center.
3. Put savings on autopilot
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Saving is painless and virtually unnoticeable when you establish an automatic withdrawal that pulls money monthly, twice monthly or weekly from your checking account.
4. Dedicate windfalls to your goal
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Pledge to put every tax refund, gift of cash, purchase refund and work bonus into your down payment account.
5. Stash away every raise
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When you earn a raise at work, carry on as if it never happened. Have the difference between your old and new paychecks funneled automatically into your down payment savings.
6. Sell your stuff
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Sell your possessions for cash to fatten your account. Money Talks News is full of inspiration and tips about how and where to make the most money selling your things. Here’s where to start:
7. Sell your car
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Pump up your savings fast by disposing of assets that have real value, like a car, boat, motorcycle or expensive sports equipment. Do without or replace the car with a cheap beater.
8. Sell taxable investments
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Do you plan to sell investments to raise money for your down payment? If so, sell stocks, bonds, mutual funds and other investments in taxable accounts instead of touching money held in tax-deferred retirement accounts like IRAs and 401(k)s. Selling investments in tax-deferred accounts carries stiff penalties if you sell before retirement age.
Dip into retirement savings with your eyes wide open: Read “What You Need to Know Before Raiding Your Retirement Plan.”
9. Get help from family
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Rules differ by lenders on whether and how much help with your down payment you can get from gifts.
One example: The FHA lets borrowers apply gifts from immediate family members toward a down payment. You’ll be required to produce a “gift letter” from the giver, verifying that the money is not actually a loan. You’ll probably also need to show copies of checks or wire transfers so your lender can verify the origin of the gift.
10. Ask your employer for help
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Some employers — including companies, colleges, universities, and state or local governments — have programs to help employees with down payments. Ask the human resources department about possibilities where you work.
When negotiating for a job, you may be able to ask your new employer to include down payment assistance as part of your compensation package — as a signing bonus or relocation assistance.
Are you trying to pull together the down payment for a home? Share your experience with us in the comments below or on our Facebook page.