When it comes to being approved for a mortgage on a home, a down payment is a requirement. This typically involves paying 20 percent of the purchase price in cash up-front, with the mortgage financing the remaining 80 percent. That’s a large chunk of change to come up with at once, and many people don’t have that amount saved in their retirement accounts. So, how will you get enough money for your dream home? Here, Trulia offers five ways to consider saving for a down payment today.
1. Determine how much and how quickly you want to save
First, consider the price of the house you can afford and then determine 20 percent of its value to come up with a target. For example, if it’s $50,000, divide that number by your time horizon. If you want to buy in five years, divide by five—you’ll need to save $10,000 per year. Divide that number by 12, and you’ll get your target monthly savings goal: $834. If you want to buy a home sooner, shorten your time horizon by saving more each month.
2. Start small to save big
Even small contributions add up over time, so be on the lookout for ways to cut costs or save more—and shift that cash to your down payment fund immediately. Simple approaches, such as downgrading your cable package or cell phone service, can offer a monthly savings boost. If you’re hoping for a more aggressive timeline, however, consider moving in with a family member to save on rent or getting rid of your car and using public transportation.
3. Invest your dollars rather than saving them
Don’t plan to buy a home within the next five years? Try going from saving in cash to investing in the market. Compound interest allows you to exponentially increase the value of your initial contributions. For example, if you invest $1,000 in a brokerage account today with the intention of buying a home in seven years, and going forward you contribute $500 per month to your account and earn an average return of 6 percent, then after seven years you’d have enough money for a big down payment.
4. Share your down payment goal
Consider asking others to help you fund your down payment. Sites such as GoFundMe allow you to set up a campaign for any reason and then share it with your social networks to garner support. If it feels strange to ask for money outright, you can gather funds from friends and family without asking them to spend more than they normally would on you. Share your down payment goal with people you normally swap presents with (for birthdays, holidays and other special occasions) and request they hold off on material goods and give cash until you fund your goal. Explain that any gift money you receive will go toward your down payment so you can buy a home.
5. Dip into your nest egg
Although pulling money from a retirement account for a down payment shouldn’t be your first choice, it may make sense to go this route to get enough money for a down payment. You can withdraw your contributions from a Roth IRA at any time without penalty or tax. You also can take out up to $10,000 of earnings without any kind of penalty if you’ve had the account for at least five years and use the funds to purchase or repair your first home. You can withdraw up to $10,000 from your traditional, SIMPLE (or SEP IRA) as well, but you will need to pay regular income tax on the amount. As long as you use the funds to purchase or repair your first home, you won’t be penalized on top of the tax. Finally, you can deduct money from a 401(k) too, but this is considered a loan against your retirement account and you’ll have to repay it. That loan also counts as debt, which could alter your debt-to-income ratio. Lenders use that metric to determine whether you qualify for a mortgage, so be careful before going this route.