Ok, now let’s go through the checklist so far:
- You’ve overcome the speculation and obstacles that are attached to home ownership
- Your credit score is at its optimal point
- You’ve figured out the home price that is comfortable and affordable for your family
- You’ve assembled (or are in the process of gathering) your Home Purchase Team
Now let’s begin figuring out the down payment.
Typically you will need to bring at least 5% of the purchase price to the table. For the purposes of this article, let’s say the home purchase price that is comfortable and affordable to your family is $214,000.00.
Depending on the bank and your credit score, you maybe able to score a conventional loan as low as 5%, but realistically to avoid PMI (private mortgage interest) you will need to bring a down payment to the table of 20%. There is also an FHA loan, that will allow you to put down as little as 3.5%. For the sake of this article, we will assume the buyer is eligible to only bring 10% to the table – $21,400.00.
Many people don’t have that kind of money sitting around in an account somewhere. So where can you get that kind of money from to form your down payment? Glad you asked, but let’s address some other costs first. There are other costs to be considered.
These fees include: fees that the lender charges, appraisal fee, home inspection, home owner’s insurance, various title fees, state fees, your attorney’s fee, prepayment of real estate interest, taxes and escrow payments. Inline with our calculations, I estimate these additional costs to be $12,300.00. Yes that is $21,4000.00 for the down payment plus the $12,300.00 totaling $33,700.00.
Where do you get $33,700.00 from? Let’s look at a few options:
- Since you have been thinking of making this major purchase, you have been saving up for it, right? This is the first source of the funding for your new home.
- If you have an IRA or other retirement plan not held with your current employer, you can tap that for funding as well. Speak with your financial planner and tax professional to calculate how much you can take out. You don’t want to sacrifice all of your retirement savings for your new home. Under the current law, you can exclude the 10% penalty on the first $10,000.00 taken out of your retirement account if you are under age 59.5.
- Your close family can gift you money. Check with your mortgage personnel to determine who you can receive the funds from, how they should be received and how much is acceptable.
- Some organizations like NACA (www.NACA.com) offer grants to assist with the down payment of a new home. Of course with any such program, there are guidelines and wait times, so check with the organization to ensure that your needs and their abilities are inline with one another.
- That side hustle that you have been acquiring money from and not reporting on your taxes that you thought we didn’t know about…? Yes, that one. You should start reporting it and paying taxes on it so you can apply these funds to your down payment.
- In the year that you absolutely know that you are going to buy the home within, you can increase your withholding at work slightly. Give yourself a raise. With the assistance of a tax professional, calculate what to change the withholding to at work. Once the change is made, the additional funds that you obtain from work should go directly into the bank for your down payment and other housing costs.
- Speak with your mortgage agent and your real estate agent, the seller may be willing to agree to a concession, called a seller’s concession. Sometimes this is a deal breaker to a home seller, but it may be worth a try. In a seller’s concession, the home seller agrees to pay a portion of the closing costs on the home buyer’s behalf.
- If you have portfolio investment, it may be time to liquidate some of them. Start with the losing ones so you will also gain the tax impact, as well.
As you can see, financing the initial payment for the home is a process. But with proper planning, a great team and terrific execution, you can succeed.