Creative Strategies To Come Up With The Down Payment

One of the biggest stumbling blocks prospective home shoppers face is coming up with the scratch needed to satisfy a mortgage lender: in other words, the down payment. But new findings show that many young buyers are employing clever tactics to afford the down payment.

Are these approaches worth it? Which strategies are best for you? And is there a way to get around the down payment requirement entirely? This article has helpful answers and advice from experts.

In this article (Skip to...)

• Creative down payment strategies to consider
• Down payment strategies to avoid
• Explore zero-down mortgage options
• The bottom line

What the research found

A recent poll by Redfin reveals that many young potential homebuyers have turned to creative strategies to make the necessary down payment on a home. Among Millennials and Gen Zers:

• 21% have used cash gifts provided by family members
• 20% sold off stock investments
• 18% worked an additional job
• 18% cohabited with friends or family to save dollars
• 57% directed money from paychecks to savings.

“These numbers line up with what many of us in real estate are seeing every day,” says Joy Aumann, a Realtor with the LuxurySoCalRealty team at Compass. “Younger buyers are doing whatever it takes to pull together a down payment. Saving from their main income is still the foundation, but that alone is often not enough anymore. This tells you how expensive housing has become compared to income. I was not shocked by any of these figures, but the overall picture shows a generation that is being resourceful under pressure.”

Personal finance expert Aimee Frey, on the other hand, interprets these findings a bit more critically.

“It’s impressive that so many folks still use the traditional method of saving their earnings to come up with a down payment. But the majority of these demographics are not financially prepared for homeownership,” she cautions. “Most of the methods reported by Redfin can put something else at risk – stock gains, relationships, and decreased savings in long-term investments like retirement funds.”

Creative down payment strategies to consider

There are many inventive and resourceful ways to gather extra funds needed for a home down payment, including all of the tactics mentioned above. Let’s take a closer look at each method and its pros and cons.

Down payment assistance programs

Many first-time buyers overlook a valuable resource: down payment assistance (DPA) programs. These help home buyers better afford the down payment costs and/or closing expenses. Offered through thousands of state, county, and local government initiatives nationwide, these programs offer grants, forgivable loans, or low-interest financing to reduce the cash needed to purchase a home. Eligibility often depends on factors like being a first-time buyer, meeting income limits, and maintaining a qualifying credit score, though the details vary by program.

“Down payment assistance can be a great option. Just understand that the money typically isn’t free,” says Matt Schwartz, branch manager and loan officer with Southlake Mortgage. “Most of these programs come at a cost, either in the form of a higher interest rate on your first mortgage and/or a second mortgage. In most cases, you’re going to pay back the money you get.”

Second job or side hustle

One surefire way to reach your down payment goal is to make more money, either by taking on a second job or side hustle, getting a raise, or both.

“I’ve seen buyers pick up side gigs like food delivery or weekend shifts at a company,” says Andrew Fortune, Realtor and brokerage owner of Great Colorado Homes. “The money can add up fast, but people get burned out. You have to watch your energy and make sure your main job doesn’t suffer.”

Also, the extra income you earn at a second job may not help you qualify for a mortgage “unless you had that second job for at least two years,” cautions Corey Vandenberg, a mortgage loan officer with Lake State Mortgage. “Because of this, I think there are better options worth considering.”

Use cash gifts

Everybody loves getting presents, especially when the gift is money to help buy a home. The good news is that you are allowed to receive financial gifts from close family members to help with your down payment. A formal gift letter is required, outlining the gift amount, the donor’s relationship to the buyer, and confirming that no repayment is expected. Additionally, the movement of funds must be clearly documented, creating a transparent paper trail from the donor’s account to the buyer’s so that the lender can easily verify the source of the funds.

“While there is typically no limit to the amount of the cash gift a buyer can receive for down payment assistance, lenders have stipulations around them,” says Frey. “For example, the FHA requires that it be a true gift with no implication of repayment of funds to the donor, and many times this needs verification of receipt such as a bank statement or wire transfer receipt.”

You’ll also need to think carefully about how to ask for a cash gift and its potential impact on your relationship.

“Without a clear understanding between both parties, animosity and resentment can creep up and do lasting harm,” continues Frey. “Always consult with a lender before planning to accept the gift, as there are specific guidelines surrounding how and when funds can be received.”

Crowdfunding

Crowdfunding for a down payment means requesting that loved ones, friends, and personal contacts donate money, via an online fundraising platform or dedicated homebuying service, toward your down payment. In lieu of asking for a holiday, birthday, or wedding gift, you can encourage these folks to contribute to your crowdfunding goal. But remember to track all contributions carefully and abide by your lender’s rules for documenting gifted funds, as they’ll likely need to see records indicating who gave the money and confirming that it doesn’t need to be repaid.

Move in with others

You’re bound to pocket more money when you don’t have to pay rent. So consider temporarily living with mom and dad, a sibling, friend, or other persons to give you sufficient time to save for the down payment.

“This is probably one of the most effective ways to save. Without rent or utility bills, money adds up faster. But it can be hard for people used to enjoying their independence, and it can strain personal relationships if expectations are not clearly set in advance. This works best when there is a timeline set and mutual understanding,” Aumann recommends.

Fortune says this is a common strategy used by prospective buyers today.

“I know buyers who have moved in with their parents for a year and saved thousands. However, you give up privacy and freedom, and sometimes it gets awkward if you stay too long,” he explains.

As a different take on this strategy, instead of moving out, ponder renting out one of the rooms in your current rented home for extra dollars.

“It’s a good way to make money from your own place, but you have to be okay with strangers in your home,” notes Fortune.

Sell stock investments

Own stocks, bonds, EFTs, or other investments? Think about parting with some of these to ease your path to homeownership. Just be aware that if you sell stock for a profit to help fund a home purchase, you’ll owe capital gains tax on the earnings, even if the dollars are not used for a down payment. The amount of taxes you will be based on how long you owned the stock; profits from assets held less than a year are taxed at your regular income tax rate, while those held for over a year qualify for lower long-term capital gains rates of 0%, 15%, or 20%, depending on your taxable income and filing status.

“Also, when liquidating investments for the sake of down payment funds, you have to consider the opportunity costs of those funds. If you are earning a sound rate of return on those investments, you need to consider whether it’s worth giving up that attractive yield,” Schwartz points out.

You’re also allowed to pull up to $10,000 out of an IRA without penalty to buy a first home, but the experts advise against liquidating money from retirement accounts, which can leave you shorter on resources when it’s time to call it a career.

Borrow from your 401(k)

If you are determined to pull cash from a retirement account, consider loaning yourself money instead from your 401(k) plan if you have one. Many 401(k) plans permit you to borrow up to 50% of your vested balance or a maximum of $50,000. This loan, which you’ll have to repay with modest interest through payroll deductions, typically must be paid back within five years, though a longer term may be allowed for a home purchase. Here, you benefit from fast cash without paying taxes or penalties, provided your loan is repaid punctually.

However, it can mean that your retirement savings won’t grow as robustly; also, if you depart your job prior to repaying the loan in full, the remaining balance may be due within 60 to 90 days or be treated as a taxable distribution that comes with an early withdrawal penalty if you’re younger than 59½.

“Fortunately, mortgage lenders will not count this monthly repayment on your 401(k) loan against you in your debt-to-income ratio,” adds Schwartz.

Down payment strategies to avoid

Not every down payment saving tactic has benefits that outweigh the downsides. The experts recommend bypassing the following strategies:

• Short-term loans, including personal loans, payday loans, cash advances, and credit cards. “The fees and rates on these are brutal and you end up owing way more,” Fortune warns. Also, be aware that many mortgage lenders do not allow for personal loan funds to be used unless this is disclosed and part of their guidelines.
• Investing your funds in risky assets. Putting your down payment dollars into crypto, individual stocks, or speculative investments that may drop in value is an unwise move.
• Mixing down payment savings with other funds. Create a dedicated savings or financial account where you can safely stash down payment dollars, and only use this account for these funds.
• Robbing your older self. As stated earlier, steer clear of extracting money from your retirement accounts to help buy a home; this can set you back years when it comes to long-term planning on being able to retire in comfort.

Consider a zero-down mortgage instead

Not every mortgage loan requires a down payment. If you want to put zero down, try applying for a:

• USDA loan. This government-backed mortgage is designed to help low- to moderate-income buyers purchase homes in rural and some suburban areas without needing a down payment. These loans often have lower interest rates and mortgage insurance costs compared to other loans. To qualify, your income must meet USDA limits, and the home you buy must be your primary residence located in an eligible area.
• VA loan. If you are an active duty service member, veteran, or surviving spouse, you can qualify for a VA home loan, which doesn’t require a down payment or mortgage insurance and comes with a competitive interest rate. Certain restrictions apply.

The bottom line

It’s smart to think outside the box when it comes to affording a home and having enough for the down payment. Try pursuing one or more creative strategies that don’t stretch you too thin, but weigh the pros and cons of these methods carefully before committing.

“Work with a trusted real estate agent and talk to a local lender early. They may be able to point you to special programs that national banks sometimes overlook,” says Fortune. “Also, don’t be afraid to ask for home seller credits – right now, sellers are more willing to help with closing costs than they were a year ago.”