The need to come up with a down payment has long posed a roadblock for many would-be first time home buyers. That’s particularly true for Millennials, who most simultaneously pay off their student debt and fund their 401(k)s–challenges their Baby Boomer parents didn’t face.
Don’t get discouraged. First, (despite what you might have heard) you don’t have to put 20% down on a house. According to the National Association of Realtors, the median down payment by first time home buyers in 2018 was just 7% of the purchase price. Second, there are lots of creative ways (beyond just borrowing from your parents or winning the lottery) to raise a downpayment.
In case you’re wondering, here’s where that magical 20% number comes from. Most mortgage lenders require a 20% downpayment to avoid paying private mortgage insurance (PMI). This insurance protects the lender, not you, and can cost anywhere from 0.5% to more than 2% of the original mortgage loan per year. With the median sales price for an existing home at $259,400 and the median price for a new home in the U.S. an even steeper $309,700, the math alone suggests a homebuyer has to come up with $52,000 to $60,000 to put down 20% on that median priced home. Add all the other fees associated with buying a house to the mix and it can seem almost hopeless.
Which is why, while a 20% down payment—and avoiding PMI costs—is ideal, you shouldn’t fixate on it if you want to become a homeowner sooner, rather than later.
So set a realistic down payment goal, and then consider creative strategies—from a side gig, to family help, to special programs designed to help struggling buyers out. Here are some ideas.
Take Advantage Of State and Federal Assistance Programs
The government wants people to own homes. To spur homeownership, local and federal agencies offer down payment assistance programs. To be eligible for these programs, buyers need to meet certain requirements that can be based on the income of the borrower, the location of the property, or the buyer’s identity as part of a particular group.
Down payment assistance programs exist for veterans, first time buyers, teachers, and firefighters. For example, New York State has the HomeFirst Down Payment Assistance program which provides qualified homebuyers with as much as $40,000 toward the down payment or closing costs. States across the country offer discounts off of the list price and/or assistance with the down payment. Potential homebuyers can visit their State Housing Finance Agency’s website to find a list of programs for their location.
Non-profits also create programs to help would-be home buyers. The Texas State Affordable Housing Corporation (TSAHC) is one example. It provides down payment assistance for teachers, firefighters, EMS personnel, police and correctional officers, veterans and Texas home buyers with low to moderate incomes.
Get A Side Gig
The path to homeownership is often paved with sacrifice. The Federal Reserve estimates that 31% of American adults work in the gig economy, most of them on a side hustle basis. So taking on some extra work could be a viable way to earn extra and save extra for a downpayment. In fact, a recent Redfin survey of Millennial homebuyers found that 36% had used earnings from a second job to help fund a down payment.
It’s easier than ever to tap into a variety of gig jobs to earn extra cash. According to job site Monster.com, some of the top paying gig economy jobs include driving for Uber and Lyft, working as a fitness training, tutoring, consulting and selling or renting properties.
If you prefer set hours and predetermined pay, then a part-time job in retail or hospitality might be viable options. Have a skill that is in demand? Offering your services on the side or consulting can quickly grow your down payment nest egg. If you don’t have the time or the skill set to bring in extra cash you can consider selling your used goods. This can be particularly lucrative if you have high priced items you want to unload. The Internet makes it easy to sell your goods either locally or around the world.
Temporarily Downsize Your Life
One of the biggest monthly expenses people face is rent. It can account for the lion’s shares of your monthly expenses and make saving for a downpayment far more difficult. But if you are serious about amassing money to purchase a home, temporarily downsizing your living arrangements is a sacrifice that can make sens.
These days, it’s common for adult children to move back in with their parents to save money. TD Ameritrade found in its Young Money Surveyconducted last year that upon college graduation, 48% of Millennials moved back into their parents home to save money.
If shacking up with your parents is out of the question, downsizing to a smaller apartment or taking on a roommate to share in the costs can reduce your monthly expenses. That, in turn, means more money for your down payment fund.
Whether your employer offers an automatic savings plan or you download an app to save your spare change, the more automatic you make saving the more successful you will be. Left to your own devices to transfer money out of your checking account and into a savings vehicle, it may never happen. That dinner with friends or a new pair of shoes can easily get in the way.
If the money is withdrawn from your paycheck before you even see it or you use an app that rounds up your purchases, saving the spare change for you, you are more inclined to stick with the good behavior. Banks also offer automatic savings plans. With these plans, money is withdrawn from your checking account each month and placed in a savings account.
Don’t think it’s effective? A study by the Center for Retirement Research at Boston College a few years back found that automatic saving was more effective than a tax subsidy in boosting savings in Denmark.
Go On A Spending Freeze
In order to increase your savings rate, you have to take in more money than goes out. One of the easiest ways to achieve that is to institute a self-imposed spending freeze. That means spending only on life’s necessities and your living expenses and forgoing everything else. While it may be tough to skip the coffee every morning or decline all the dining and movie invitations that cost money, it can help you reach your downpayment goal faster. It’s ok to indulge every now and again, but if you want to come up with a down payment in a reasonable amount of time, you’ll have to make drastic changes. It can also be life altering if it becomes a habit.
Amassing the downpayment for your first home purchase can be daunting. But there are strategies that can help you achieve your goal, if you are serious and ready to sacrifice in the short term.