As housing prices rise, down payment requirements jump, too. In November, the median home price was $379,000. Even with a low-payment FHA loan (3.5% required), it could come with a down payment of over $13,000—barely a pocket change for most homebuyers.
So how should buyers pay these ever-increasing costs? There are a lot of options, but here are the three best.
If you can cover the costs of the down payment through savings, this is ideal. It won’t come with any interest costs or application process, and you can easily get the payment through your bank or credit union.
You’ll just need to make sure you still have plenty of things left for emergencies. Most financial experts recommend having at least six months of expenses on hand. As a homeowner, you’ll need enough to cover mortgage payments, utilities, taxes, and other bills, as well as any unexpected repairs that might come up.
Keep in mind: You can also use a low payment loan program to reduce the savings that you will need to override. Many loans require as little as 3% minimum. (If you qualify for VA and USDA loans, the down payment required is zero.)
2. Grant down payment and assistance programs
Many states and municipalities offer advance payment assistance programs that can help cover your costs. These vary by region and are often reserved for low-income buyers, but if you qualify, they can cover part or even all of your down payment (and closing costs as well).
In some cases, this assistance may need to be repaid, although the repayment requirement is usually waived as long as you stay in the home for a certain number of years. And with other programs, your help may actually be a grant, which means it never needs to be repaid at all.
To find a program in your area, contact the state housing agency, or use the Department of Housing and Urban Development’s state housing directory.
Crowdfunding is becoming an increasingly popular way to fund down payments. Many people ask for donations in lieu of graduation or wedding gifts (one of my friends did just this last month!), and others set up large-scale crowdfunding campaigns on sites like GoFundMe or Feather the Nest. They will then click on their friends, family, and social network for contributions until they reach their goal.
A similar option is to get direct gift money. Your mom, dad, siblings, aunts, uncles or grandparents can write you a check for the down payment, and you can use this money on closing day. As long as it’s not a loan (which means it doesn’t have to be repaid), most loan programs and lenders usually allow it. They will only need to write a letter confirming that it is a gift and that they do not expect repayment.
Many ways to pay
Of course, this is not the only way to pay a down payment. You can also take out a 401(k) loan, ask your employer for help, or use a tax refund if it’s big enough. If you sell a home and buy a new one, you can use the profits from the previous sale to cover costs.
The best option really depends on your unique situation, real estate goals, and budget. If you are not sure, talk to a financial advisor or mortgage broker for guidance in determining the best method of payment for you.