If you’re thinking of purchasing a new home, it can be a little bit daunting when you realize how much is needed for that down payment, and how to figure out what you can afford to pay in a mortgage every month. It’s no wonder that buying a home is one of the top ten most stressful activities for anyone to go through. While it is an exciting time, buying a home is a big investment, and most likely, the most significant investment you will ever make.
How to know if you are ready to buy a home
While it is becoming less and less common to need the full 20% down as was the standard in the past due to less stringent underwriting requirements and banks and mortgage lenders wanting to sell more loans, even a 10% down payment can be challenging to come by. So, what do you do when you find the house of your dreams, finally on the market, and you don’t have enough fund in the bank to make an offer and provide a down payment? And, how do you make sure you don’t get in over your head with a payment you can’t afford? Follow these steps and strategies below to ascertain your financial situation, and go into that mortgage process well educated.
- Figure out how much you will actually need for your down payment. Understand that this amount is factored by current market conditions and two things; the desired initial loan-to-value (LTV) ratio, and when you want to make the purchase. You need to know the top end of what you might be able to come up with, as the down payment is a crucial factor of any offer you put together and present to the homeowner, or home builder, depending on whether or not you are buying a pre-existing home or building a new one.
- Seek out a loan option that will allow you less than the traditional 20% down. 203b mortgage loans, otherwise known as FHA loans, require under 5% down and generally have a lower interest rate than conventional loans. If you or your co-borrower were in the military, then you might be able to qualify for a loan through the Veteran’s Administration (VA). In many cases, these loans don’t require any down payment, but it is recommended that you put whatever down payment you can, towards the home, as it will lessen the interest that you will pay over the life of the loan. Finally, a conventional loan allows a seriously low-down payment, sometimes 3%.
- Investigate options to withdraw from your IRA account, without risk of penalty. While you will still need to pay taxes on the amount you withdraw, purchase of a home is often an acceptable reason for early withdrawal. If you’ve been saving for your retirement for some time, you may have the full down payment amount you need, or enough to make a pretty big dent in the amount you need to come up with. However, if you do take this path, make sure that you increase your future deposits into the account, to help make up for the amount you have withdrawn. Maintaining a path towards a healthy retirement should remain in your focus, and should stay a priority.
- If you don’t want to take a withdrawal from your IRA, consider taking a loan from your 401(k) account. As with the IRA account example above, it is possible that if you have been saving for your retirement for quite some time, that you might have all or much of the funds you need to make a respectable down payment. And even better, while you will likely have to pay a minimal administrative fee, you’ll be paying yourself back, interest and all.
- Get a part-time job that allows you to make money fast. With the advent of Uber and Lyft, and many online freelancing communities such as Thumbtack, Fiverr, UpWork, and others, it is easier than ever to make some cash on the side, especially if you have a talent that you can share with others. Are you great at gardening or love to shovel snow? Then sign up for an account with Thumbtack, where people often go when they need a hand in the garden or in clearing their driveway. Are you great at writing? Look for a freelance writing gig on a site such as Fiverr or Upwork. In many cases, people posting on these sites are looking for work fast, which means you can have cash in hand, often in one week or less.
- Have a garage sale or sell some of your no longer needed items online. With sites such as eBay, Facebook Marketplace, Craigslist, and more, your trash is very well someone else’s treasure. If you haven’t cleaned out that storage closet in a while, or have clothes that you no longer wear or don’t fit but are in good condition, get those items up for sale. While a garage sale can take some time to plan and execute, online sales or auctions can sometimes result in same day transactions if the item is something that someone else wants badly enough. The additional benefit of this strategy is that when it comes time to pack and move, you’ll have less to pack up and take with you.
- Ask for a gift from your family. While this one might make you a bit uncomfortable, don’t wholly scratch this option off your list. If you know that you will be the fortunate recipient of a nest-egg or family inheritance at some point in the future, consider asking that family member for an early advance on your windfall. In many cases, you might be surprised to know that your loved one will appreciate the opportunity to help you with this critical investment in your life, and will enjoy knowing that they are around to see you make the big move.
- If you aren’t the future recipient of a monetary windfall, consider asking for a raise, or even an advance on a future bonus. Or, see if your employer offers any type of housing assistance programs. While these aren’t slam dunks, the worst you can find out is that they say no. But if you are told yes and there are funds available for you to borrow against, or you do indeed get a raise, then it is a win-win around the board, because isn’t it great to know that you work for an employer that is so invested in you?
While not all of these strategies will work for everyone, it is worth the time to explore. If you indeed have found that house of your dreams, and if it is meant to be, one or more of these options may become your reality, and before you know it, that moving truck will be pulling up to unload all your precious possessions in your new home.
