Many people make enough money to afford monthly mortgage payments and household upkeep, but having enough cash for a down payment can be difficult. Here are some common ideas on where that money might be found.
- Sale of your current primary residence. Assuming you bought your house some time ago, the combination of its increase in market value and the decrease in the principal on your home loan should leave you with some cash to reinvest.
- Other real estate. If you own a rental or a 40-acre recreational property that no longer pays to grow local crops on, you can liquidate your holdings to generate cash for your down payment. If you don’t want to sell, you could consider borrowing against your property. Be careful, however, while capital gains exemptions are in effect when selling a primary residence, this is not the case for investment properties. If you sell something other than your primary residence, you’re likely facing capital gains taxes, which will have to be deducted from the proceeds before calculating the net cash. If you’re really clever, you could exchange the rental property into a house that could eventually become your primary residence (see my column on 1031 Exchanges). DON’T try this without talking to your accountant or tax advisor.
- Liquidate other assets. Investments of any variety can be liquidated. However, like real estate investments, the sale of other investments is likely to have capital gains consequences. Keep in mind that liquidating assets is good for raising cash, but to do so you must sacrifice investment income, which may impact the overall loan you can afford.
- If you’ve been really diligent and put away 10 percent or more of your annual earnings, you’ll have a sizable nest egg to pull from for your down payment. When I’m talking about savings, I’m not referring to your retirement (e.g., IRA, 401K). Some first-time homebuyer programs may allow a tax-free/penalty-free withdrawal from your retirement, but retirement cash is expensive. My CPA let me know you can typically withdraw $5000 without penalty for a down payment.
- If you’ve chosen your family correctly, you may have funds from Great Aunt Mathilda. While you’ll miss her, her legacy will live on in your new home.
- Family Gift. Your family doesn’t have to die to help you with a down payment. A gift from the Bank of Mom & Dad is a realistic and viable way to generate cash in today’s world.
- Executive-level employees can sometimes expect a company loan or gift, especially when relocating for the company. If a real estate loan or gift isn’t called by that name, you may see an increase in salary, part of which is considered a housing allowance.
- Lawsuit Settlement. While this is not my preferred way of gathering cash for a down payment, it can be effective. Serious injury cases sometimes have insurance settlements large enough for a down payment.
- No Need for a Down Payment. Some loans do not require a down payment, especially first-time homebuyer loans from the United States Department of Agriculture (USDA) or the Federal Housing Administration (FHA). While the monthly payment will reflect mortgage insurance payments, and the interest rate will be a bit higher, these loans have made it possible for many people to buy houses without out-of-pocket cash. You will need a verifiable source of income and good credit to qualify.
- Grant Program. From time to time state and federal programs to help first time homebuyers will include grants for down payments.
If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.