The Best Kept Down Payment Secrets

Many renters dream of buying their own home. What stops them? For many people, it is the problem of making a down payment.


It is certainly possible to buy a home without a down payment. There are 100% mortgages, motivated sellers who provide a down payment, and various down payment assistance programs. All those options are worth exploring.


However, for many people, making a down payment is easier than you might expect, even if you have little or no savings. Here are some of the most common sources of funds for that all-important first down payment.


Check the closet


Many people find that they have a down payment in storage, literally. If you own art, jewelry, antiques, an extra car or motorcycle, stocks and bonds, Advanced Payment Bond  or other valuable assets that are just gathering dust … it might be time to cash in on them. Selling some items that no longer make sense to your lifestyle can generate the cash for your down payment.


Retirement funds


A very popular way to generate a down payment is by borrowing against your retirement funds, such as a 401k. Many company plans essentially allow you to borrow this money yourself, at a reasonable interest rate. You’ll have an instant down payment, without giving up your retirement security.


If your retirement plan doesn’t allow you to borrow for your down payment, consider putting less into your retirement fund for a year or two, until you’ve accumulated a down payment. Some people even withdraw money from their retirement plans as a down payment. Yes, you will pay a penalty and additional taxes, but it may make sense for your long-term financial health and peace of mind.


Gifts from relatives


Here’s the bad news: You can’t borrow a down payment from family members or another source (like a cash advance from a credit card). Why the restriction? Lenders have found that, historically, borrowers who have no investment in their home are much more likely to default on their loans. And they don’t want you to take an expensive mortgage when you already owe money to your family members. Most lenders worry that if you have to make a decision, you will pay family members and ignore the mortgage.


The good news, however, is that you can use a gift from a relative as a down payment on a house. Lenders have found that when your family members have invested money in your home, they are much less likely to default on the loan. If you choose this route, the lender will likely want to see a gift affidavit from family members, stating that they do not expect to be reimbursed.