My Perfect Mortgage
Understanding the Importance of a Down Payment
7 minute read
September 16, 2021

Down payments are possibly the biggest hurdle for many first-time home buyers

Even if a 20% down payment is not required, you’ll typically want to save as much as you can to put down. 

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This can be challenging, but not impossible. There are many creative ways to find some extra money to put toward your down-payment for a mortgage

Let’s discuss 10 of your best options. 

1. Create a Savings Timeline

Your first step in turning your daydream into a reality is to sit down and think about what you want and when you want it. 

You already know your goal is to save for a mortgage down payment. Is this a three-year plan, a five-year plan, a near-future plan? 

Some methods of saving will need a few years to mature. Once you have a plan in place for your homebuying timeline, you’ll feel much better about what you need to do. 

Pick your goal date and work backward from there, noting how much money you want to have saved and divide by the number of years in your plan. 

2. Research Loan Options

Think about other things like what kind of home you want, your desired location, and your loan options. This will help you estimate how much you’ll need to save for a down payment. 

For example, an FHA loan down-payment can be as little as 3.5% of the home’s price. 

Other loans you could qualify for, like a VA or USDA loan, might not even require a downpayment. 

Fannie Mae also offers the HomeReady Mortgage for low-income buyers that only requires a 3% down payment.

3. Budget and Cut Costs

It’s good to review your budget occasionally anyway, but especially when you have a savings goal in mind, such as a mortgage down payment. 

List all your current monthly expenses and income. Look for areas that could be cut back for the time being. 

Maybe you don’t have to upgrade your cell phone right now. Maybe you plan a more low-key, budget-friendly vacation this year instead of paying for the big resort or Disney tickets. 

Then there are the small-scale, day-to-day habits you can change. 

If you have to go out for coffee every morning or buy lunch, reconsider prepping these things at home most days. Take advantage of your local library for entertainment to save on streaming services.

You should also work on having a consistent amount of savings in your budget every month. 

Find how much you can afford to put away from each paycheck after all your expenses are paid and plan to save a portion. 

Some banks offer recurring transfer tools so you can set a designated amount to automatically be transferred from your checking to your savings account.   

4. Pay Off High Interest Debts

Yes, this list is supposed to be about saving money, not spending. 

But pushing to get those loans or credit cards with high interest rates paid off before you begin your homebuying journey will ultimately help you as you save for your mortgage down payment. 

This is the advantage of creating a timeline with your ultimate goal being to purchase a home

Start paying off those debts a year or two before you know you’ll start looking for a home and you might just end up saving a good chunk of change in terms of interest costs.  

5. Ask for a Raise

An obvious way to help save for a down payment is to increase your income. 

Asking your employer for a raise is not necessarily fun but is totally doable with some preparation. 

The ease of this will also depend on your relationship with your employer and your job performance. But in all situations, you should prepare to present your worth to your company and how you’re adding value.

This can be done in a few ways but visually showing your boss the deals you’ve closed or profit you’ve directly contributed to will go a long way in convincing them to give you a raise. 

6. Explore Other Income Options

Let’s say your conversation from the previous scenario didn’t go well and you did not get a raise. 

You could always look for other jobs in your field that pay more or look into moving up internally. 

You could even keep your current position and figure out a way to bring in some extra income outside of your job. Services like Lyft or Doordash make it easy to temporarily make some extra cash. 

Think about what you’re already good at. If you’re an accountant, start taking on individual clients during tax time. Or maybe if you’re a contractor, you can pick up some side work. 

It may seem like a lot of extra work but all of your efforts will pay off once you’re finally in your new home. 

7. Use a CD ladder

A CD ladder, or certificates of deposit, can help you take advantage of your savings. 

A CD account is like a savings account, where you agree to keep your initial deposit in it for a specific amount of time until it matures. 

The amount you put in will earn interest until its maturity date, at which point you can withdraw the funds. 

One way to take advantage of CDs is to open several CD accounts all with different maturity dates. That way you have consistent access to matured funds. 

Different banks have options for CD accounts and will sometimes let you choose your term or raise the interest rate on the account. You just need to research to find the best one for you. 

This option will take some planning as it will take a few years for your account to mature. 

8. Save Windfall Money

Windfall money is any extra, usually large amount that you get at a time. This could be your tax returns, stimulus check, annual bonus, or commission check. 

Every chance that you get to save, you should. 

One instance of saving a few thousand dollars can shave off the time it takes to get to that down payment goal. 

9. Borrow from Relatives

This one is tricky for a few reasons. 

First, you’ll need to clearly determine if this amount is a gift or a loan. You don’t want any bad blood to arise because of miscommunication. 

Another reason this may be more difficult to navigate is that lenders have different guidelines as to whether gifted down payments are allowed and from whom. 

The guidelines for conventional loans dictate that the gift must come from a relative — spouse, child, or anyone related legally or by blood. 

The reason for these requirements is because borrowed money will affect your Debt to Income ratio. Lenders want to protect themselves and make sure that their borrowers have enough funds on their own to handle this loan on an ongoing basis. 

FHA loans, on the other hand, allow gifts from others including friends, labor unions, employers, or charity organizations. 

In most situations, a gift or loan for a down payment can’t be given by anyone who has a vested interest in the sale of the home. This includes sellers, agents, brokers, builders, or anyone else who may benefit from the sale. 

Your lender may also request a gift letter from the person gifting or loaning you the down payment. This tells the lenders who is gifting the money and why. The letter must be signed by both parties. 

10. Pause Retirement Contributions

You might hear that borrowing from your retirement accounts is one way to help with your down payment but that can be risky. 

If it’s a 401(k) account, you’ll be subject to a 10% early withdrawal penalty fee. IRAs don’t have this penalty but you will be taxed for the amount you take out. There’s also a $10,000 cap on funds that can be taken from your IRA. 

The better way to go is to simply pause contributions, temporarily, rather than taking anything out. 

Stopping your contributions for one to two years could easily boost your down payment savings and you can continue with your contributions once your home is purchased. 

Just don’t rely on this as a long-term solution — if it’s taking you five years or more to save for your home then this method may hurt you in the long run rather than help.

Saving for a down payment can be hard. The rest of your home buying journey shouldn’t have to be. 

When your down payment for a mortgage is ready, contact My Perfect Mortgage and we can help you find the perfect lender for you.

Photo by Karolina Grabowska from Pexels

Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.