Of course the best way to come up with a down payment is to save for it. But what if you happen upon your dream home? Here are 5 ways to quickly raise a down payment, as well as the pros and cons of these options.
Dip into your 401(K)
If you’ve been saving money in your 401(k), it is possible to borrow from that for a home loan—and get that cash in hand fast.
But it will cost you: If you take funds out of your 401(k) early—before you’re 59½ years old—you’re going to take a 10% penalty on that withdrawn money. And it counts as gross income, which can bump you into a higher tax bracket.
Check out this Wells Fargo calculator to see what your penalties would be. In addition to penalties, most companies require you to repay that vested money over five years—or sooner if you quit or get fired. So be sure your career is stable.
Pull from your IRA
IRA withdrawals usually carry the same 10% penalty of borrowing from your 401(k), with one major difference: The penalty doesn’t apply to first-time home buyers. Also unlike a 401(k), you don’t have to repay what you take out of an IRA. However, the withdrawal is still taxable. Plus if you don’t repay yourself, it can hurt your long-term retirement.
Ask your employer
You can ask if your company has an employer-assisted housing program. Companies hate employee turnover, so what better way to keep you around than pitching in to help you buy a home? It’s a win-win, if your company offers it.
Check out state and local programs
Local assistance programs can also help you collect cash for a down payment. Offered by state, city, or nonprofits, these programs often partner with banks, who hope to gain clientele they might pass over otherwise: Bank of America, for instance, recently launched a searchable database of local programs. But, you have to qualify for these programs.
Gift from the fam
Many home buyers turn to their family for help buying a home. There are no limits on how much a family member can “gift” another family member, although only a specific portion can be excluded from taxes ($14,000 per parent).
But it’s not just as easy as that. Gifters, even family, will need to provide paperwork in the form of a gift letter.
Do you have questions about financing your dream home? Call me, I’d be happy to help!