Where Will the Money Come From?
Does this sound familiar: You build up $5,000 in savings, and then $800 goes for a car repair. How can you put together a down payment? Sometimes it seems that a down payment on a house is a hurdle too large to overcome. Is it hopeless? Of course not.
As the price of homes climbs each year, even by a little bit, you are likely to find your goal more and more elusive. By the time you have $6,000 saved up, you learn that you now need $9,000.
Saving, while certainly a commendable practice, may not be the answer in this instance. You cannot save for the next ten years while home prices and down payment requirements keep rising; you'll never catch up.
If you can afford the mortgage payments on a house once you own one, and you do have enough money for the 4–6 percent of the mortgage you will need for closing expenses, it makes sense to tap every source you can for a down payment and buy now.
The down payment is the one area of homebuying likely to prove particularly challenging. Still, you may well be able to buy a home even when you do not have enough up-front money.
Down payments often come from savings, proceeds from the sale of a home, or from gifts. Your lender will want to verify where your initial down payment has come from. If the money was a gift, they will want to see check stubs or a letter from your parents (or whoever has given the money to you) indicating this money was, in fact, a gift.
Look over your own resources. Maybe you are sitting on cash you had not considered. Do you have stocks you can sell? Do you have valuable silver or jewelry that you're willing to part with? Can you sell a car? What about tapping into retirement savings? Be careful here, though, of penalties and income taxes due on this money — and the fact you will one day need your retirement money.
In your eagerness to amass a sizable chunk of money, be careful not to leave yourself without emergency resources. Keep in mind there are ways to buy a home with a low down payment (a process that is discussed later in this chapter). Don't use every last penny you have just to make the down payment.
If you decide to liquidate assets (that is, to sell them for cash), it is best to get the money into a savings account as quickly as you can. Don't wait until the day before you need a down payment to sell your Chevy!
Table 2.2 Sources of Down Payment
* Less than 1 percent.
Source: National Association of Realtors Profile of Homebuyers and Sellers 2007
It is not a good idea to borrow what you need as a cash advance on your credit card. Yes, you can get the money quickly without bothering relatives, and you can pay off the loan each month over a long period of time, but consider these negatives:
Credit-card interest rates are usually the highest in the legitimate lending business.
You cannot take tax deductions on the interest. (Remember that you can deduct the interest you pay on a mortgage, giving you a substantial savings in taxes.)
Borrowing your credit limit for a home will mean you will not have any advance available in the event of an emergency.
Credit-card borrowing will push up your debt load in relation to your gross monthly income. Lenders consider these figures carefully, and having too much credit-card debt might prevent you from getting the mortgage you want (or perhaps any mortgage at all).
