In the highly-competitive Southern California housing market, the thought of sourcing funds for a home down payment can send shivers through first-time home buyers. Never fear, though. There are lots of options.
Sometimes would-be home buyers get discouraged by myths that just aren’t true. Chief among them is, you need to put 20% percent down. If you’re following this school of thought, spending $500,000 on a modest home or nice condo puts you at a $100,000 down payment. But who has that kind of cash in the bank, especially with rents being so high?
Here are the real numbers for minimum home down payments in Los Angeles and Orange counties.
- 3% down with a conventional/Fannie Mae qualifies you to borrow up to $453,100
- 3.5% down with a Federal Housing Administration loan qualifies you to borrow up to $679,650
- 5% with a conventional/Fannie Mae loan qualifies your to borrow $453,100 to $679,650
- If you’re a veteran you can qualify with no money down for a $679,650 loan from the Department of Veterans Affairs
Even with these lower down payments, buying in this house market can entail coming up with thousands of dollars. Here are some possible sources to fund your home down payment:
- Income tax refund
- Bonus check from work
- Documented sale of car (Possibly by downsizing from an expensive car to a modest car)
- Money gifted from a family member (who may use savings or might pull from a home equity line of credit)
- Loan from 401k retirement fund
- Down payment assistance programs
Alissa Samia Alvarez, a mortgage banker with Skyline Home Loans, said she’s seeing more families pool assets to purchase property. Whether it’s a parent gifting or loaning a low- or interest-free sum to their child, both parties should have a discussion about their expectations before money exchanges hands.
“Have something in writing, just in case,” Alvarez said. “You can say something like, ‘This is to protect you and because I care. I appreciate you helping me out and want to show just how serious I am about buying a home.'”
Before asking a parent for help with a down payment, it’s important to consider your audience. Think about what type of people your parents are and tailor your pitch to their personality. You probably know them better than just about anyone.
“If you go into business with family, just be prepared for the relationship to slightly shift,” Alvarez said.
Another great source to tap for your home down payment is your 401k retirement plan through your employer. There are several things to keep in mind when considering this option, said Traci Stier, a senior loan consultant at LoanDepot.
- You cannot borrow from all 401k plans. Usually, it has to be an active 401k where you are employed by the participating company.
- Call your 401k plan administrator and tell them you want to borrow against your plan to purchase a home.
- Typically employees can borrow up to 50% of the 401k plan’s balance.
- Ask your plan administrator about repayment, including what is the term, rate, and minimum monthly repayment amount.
- Ask your plan administrator what is involved from loan application especially, how do I apply online and how soon can I have the money? What you don’t want is to have closing date of escrow delayed while you wait for your 401k-funded loan to arrive.
If none of the previous funding options are available to pay for your down payment, there’s always the option of squirreling away savings. Consider cutting things like Starbucks purchases, clubbing, eating out at restaurants, underutilized gym memberships, and other luxury or frivolous spending. It’s possible to save $200 per month by cracking down on these expenses – that would be $2,400 in 12 months.
Another possibility that some couples have used to raise funds for a down payment is to skip a wedding registry for plates and flatware and instead ask their friends and family members to help raise money for a down payment. Several sites offer this as a possibility, including Feather The Nest, Honeyfund, Zola Registry
With home prices and mortgage interest rates rising, it may be tempting to wait for a buyer’s market. However, data shows that the market is still strong and will continue to appreciate for the near future – so don’t get priced out of your dream of home-ownership.