BY LISA LEE
Many want-to-be homeowners get discouraged when they think about coming up with a down payment, but this key piece of the homebuying puzzle doesn’t have to be overwhelming. Finding the money for a down payment is possible, especially if you apply a little research, discipline and creativity.
1. SET SHORT TERM GOALS
“Saving can be simple and it doesn’t have to hurt,” says Sherrie Au, a REALTOR at Prudential Locations in Kailua. “Figure out how much you need to save and set a reasonable path to reach your goal. If you break your target amount into smaller, more manageable monthly savings goals, you won’t feel overwhelmed. Saving will become part of your monthly routine, and at the end of each month you can pat yourself on the back when you’re one step closer to your new home!”
To make sure you meet your monthly goals, you can set up an automatic bank transfer from your checking account to a “new home” savings account. 2. MAKE YOUR SAVINGS WORK FOR YOU
Not all savings accounts have the same terms or benefits. In today’s low-interest environment, a standard savings account may not give you the most bang for your buck. Au advises her clients to shop around for the best deal:
“Look for banks or credit unions that offer higher rates. See if they have CDs that will yield a higher interest rate. Talk with a financial adviser about whether investing in mutual funds or f i x e d – t e r m investments such as bonds can be safe and productive for your goals. Every little bit adds up, so make sure your savings are working as hard as you do.”
3. REFINANCE YOUR CAR AND OTHER LOANS
If you have a car loan or a personal loan that was taken out when interest rates were higher, you might be able to refinance at a lower interest rate, which will save you money each month.
Redirect the money you save into your “new home” savings account.
4. TAP INTO AN IRA ACCOUNT
First-time homebuyers may take an early distribution of money from the IRA without having to pay a 10 percent penalty for withdrawing funds before the age of 59 1/2. This early distribution is added to your taxable annual income, however, so it could affect your income tax bracket.
“There is a one-time, lifetime limit of $10,000 for first-time-homebuyers,” says Dan Falardeau of New Direction IRA Inc. “A couple could each withdraw $10,000 (for a total of $20,000) toward their down payment, and they have 120 days to purchase the home from the time of distribution or the 10 percent penalty kicks in.”
5. BORROW FROM A 401K PLAN
Most 401k plans will allow you to make a loan to yourself. The interest and the terms of the loan may vary according to the 401k plan, but the interest is paid back to yourself – not a bank. “This can be a very good option for most buyers,” says Falardeau.
6. GO TO THE GOVERNMENT
The federal government has programs to help moderate-income buyers obtain mortgages with lower down payments, and in the case of VA loans, with no down payments at all. You can check with the Hawaii State Federal Housing Administration to see if you qualify for any of these programs or talk with your real estate agent.
7. SEEK SELLER FINANCING
Some sellers who are highly motivated to sell their property quickly may be willing to consider non-traditional financing arrangements. Cheryl Nekota, a REALTOR Associate at Prudential Locations in Pearlridge, recently represented the seller in a seller-financed agreement of sale. “The buyers had a strong down payment and the income need to make monthly payments, but one of them didn’t have a credit score and wasn’t able to qualify for a loan.”
Lease option agreements are another option. “The buyer rents the property for a period of time before purchasing it,” says Nekota. “In many lease-option arrangements, a portion of each rental payment is set aside and reserved for the mortgage down payment.”
8. CROWDSOURCE FROM FAMILY, FRIENDS
Crowdsourcing is a popular concept these days in business, but it can work for down payments, too. Asking close family and friends to assist you with small loans or financial gifts can help build the cash you need now. Nekota explains, “If the money is documented as a gift, this can protect your credit score, because your credit score is affected by all documented loans of any type.”
Family members can receive up to $12,000 per person a year without having to declare the gift as income on your federal income tax.