As a part of buying a home, you have to come up with the down payment. This money is used when securing the loan, taking some of the risk off the lender. In addition, the down payment is deducted from the closing amount of the home. For instance, if you found a home for $150,000 and you were able to put 10% down, you would end up financing $135,000 plus any additional fees. However, the key with a down payment is that the more you can put down the less interest rate you will pay.
For most homebuyers, the challenge is coming up with the money needed for the down payment. Typically, you will see young couples scrimping and saving until they have between 3% and 5%, barely enough to qualify for a special type of loan program. As you will see, you have options for getting the down payment together. Yes, you might need to put extra effort into the process but if you are serious about buying and securing a good loan and low interest rate, then you take aggressive steps to succeed.
First, get all of your credit cards paid off, starting with the highest interest rate cards. For this, you will need to pay more than the minimal amount. As an example, if you had a credit card with a high interest rate and a $1,000 balance, if you paid only the minimum payment due, it would take you close to 30 years to pay it off. Instead, send in extra money each month, requesting that it be applied to the principal of the balance. If you have one or two credit cards with a zero or little balance and in good standing, keep the accounts open but do not use them, which will actually be used as positive credit.
Second, learn how to make money work for you. In this case, you might consider
buying ladder CDs that can start earning interest for you. While you would need to sit on the CDs or a while, it is a way of earning money. If you were to purchase three, six, or twelve month CDs, which is called “laddering” instead of one large CD, you would find the savings much better. Then, the money earned could be pulled out and used to help with the down payment on the house.
Find out what special programs are currently available to help you. Unfortunately, most people have no idea that there are ways of getting assistance with the down payment but there are. Therefore, talk to a reputable lender about some assistance from Fannie Mae or Freddie Mac, both government-sponsored offices. Next, consider using your IRA. For first-time buyers, the IRS has tax laws that allow you to use up to $10,000 of IRA funds as a down payment on a home.
Finally, you might want to think about borrowing some money out of your 401K account. If you work for a company that has set up a retirement 401K account for you, you can use some for purchasing a home. The only drawback is that the money is more like a loan, meaning it would have to be paid back. However, it is an option if you need more money for the down payment and if your budget allows.