Qualifying for a mortgage is one hurdle to homeownership, but often, the most challenging hurdle is coming up with the down payment. While you don’t necessarily have to put the standard 20% down, you’ll still need to make a down payment to buy a house in most cases.
If you don’t think you have enough saved to make a down payment on a house, there might be an alternative. Here are a few creative ways to come up with a down payment when you don’t have enough money saved.
1. Down payment assistance programs
There are hundreds of down payment assistance programs out there for folks who are prepared to take on a mortgage but can’t afford the down payment. These programs typically offer grants to cover part or all of your down payment, but you do need to qualify and apply for them.
For example, the HOME Foundation Buyers Assistance Grant in Oregon gives eligible home buyers $1,000 to use toward a down payment. The Arkansas Dream Down Payment Initiative offers people with low income up to $10,000 to cover a down payment in the form of a loan that can be forgiven (in other words, you don’t have to repay it) if you meet certain requirements. Down payment assistance programs are generally state run, so do some research on what’s offered in the state where you plan to buy.
2. First-time home buyer programs
There are also plenty of first-time home buyer programs that let you put down as little as 3.5% or even 0%, and you can often qualify as long as you haven’t owned a home in the last three years. The most common are FHA loans, USDA loans, and VA loans.
- 3.5% down payment with a 580 or higher credit score
- 10% down payment with a 500-579 credit score
- Requires mortgage insurance
- Zero down payment
- Must be lower income and buying in a qualifying rural community
- Requires mortgage insurance
- Zero down payment
- Must be an eligible service member or veteran
- Must pay a one-time VA funding fee of 1.4% to 3.6% of loan amount
3. 401(k) loans
If you have a 401(k), you might be able to take out a 401(k) loan to cover your down payment, but make sure to weigh the pros and cons before doing so. Taking out this type of loan is not the same as borrowing from your 401(k), and actually, it’s not the same as a loan either. When you take out a loan from your 401(k), you’re borrowing money from yourself. When you pay it back — interest and all — you’re paying all that money back to yourself by putting it back into your 401(k).
Pros:
- Because you’re borrowing from your own money, there are no credit requirements.
- While you will make interest payments on the loan, that money goes back into your 401(k), so it’s better than getting a personal loan and paying interest to a lender.
- Typically, repayments are deducted automatically from your paycheck, so you don’t have to worry about forgetting to make a payment or falling behind.
Cons:
- You’re losing out on the growth your money could achieve while invested, and this could make a serious dent in your retirement funds.
- If you quit your job, change jobs, or are fired, you may have to repay the entire loan or risk defaulting.
- If you default, your remaining balance will be considered an early distribution, and you’ll be taxed on it accordingly. This isn’t as big of a hit as defaulting on a traditional loan since it won’t hurt your credit, but it’s still worth considering.
4. Down payment gift
No one likes to ask for money, but if you have friends or family who are willing to give you a down payment gift, it could be just what you need to secure your first home. There are some rules surrounding down payment gifts in regards to who can give and receive them — and how much you can receive. Also, you’ll still have to prove to your lender you can afford the mortgage, and they’ll want to verify it’s a gift and not a loan. Depending on your loan type, there may be other rules.
If you’ve exhausted your options for down payment assistance and still aren’t able to come up with the money you need, it might be time to reconsider whether you’re ready to buy a home. It’s always better to wait and save money than to jump into a financial commitment before you’re truly prepared.
Once you are ready to buy a house, these methods for decreasing your down payment responsibility can make becoming a homeowner more accessible and leave you with extra cash for things like furniture and an emergency fund.