There has been a lot of news lately about the $8,000 first time home buyer tax credit, and a lot of disappointed home buyers when the news was released that you won’t be able to use the credit as part of your minimum down payment. I get calls every day from renters who want to buy a home now, and many of them are well qualified for an FHA mortgage here in Chicago Illinois based on their income and credit situation, but they fall short when it comes to having saved up enough money for the down payment and closing costs. Saving cash is always a struggle, and the no money down loans have all disappeared. So if you want to buy a home, you will need to come up with some cash. For many wannabe first time home buyers this is a cruel twist. Once they buy the home the government will give them a check for $8,000. But now, when they need it most, they can’t get a thing. But with a little creativity and ingenuity, there are ways to come up with the cash to close without resorting to loan sharks or placing your hopes on lottery tickets.

Here are some ways to accumulate cash now, when you need it most:

1. Gift from a relative. With FHA, your entire down payment can come as a gift from a relative. Maybe you don’t have any one relative with the means to give a big gift, but you can ask several relatives for several smaller gifts? We will need to document the gift showing a paper trail of the money from the gift donor to you. We show this as a gift, and the gift letter states that this isn’t a loan and there is no expectation that it will be repaid. At the same time, when you have closed on your loan and the government sends you your $8,000 check, if you want to show your gratitude to someone by giving them some money, that is entirely up to you (And the truth is, it happens all the time).
2. Use your 401k or IRA. Do you have any money in a 401k retirement account? How about an IRA? You don’t want to use your retirement savings unless you have to, but for many first time home buyers this is the best option for funds. Most 401k plans allow you to borrow against up to half your savings in order to purchase a home and doing this means you will pay yourself back and keep the savings intact. Another option is to cash in the 401k or IRA. Doing this means you are getting rid of the retirement savings, which is a problem down the road and you may have to pay taxes on the money you withdraw. There is usually a 10% penalty when you withdraw your funds, though that doesn’t apply if you are a first time buyer using the funds to pay for the purchase of a first home (up to $10,000). One way to get around the taxes and penalties is by paying the money back within 60 days (once you have the $8,000 credit). Make sure to talk with an accountant before you make a decision on this.
3. Sell something – If you’re like most people, you probably have more stuff than you know what to do with, and if you are willing to part with some of it, this could be the basis for a down payment. This could be a car or a motorcycle, a musical instrument or collectables like baseball cards or comic books. Check out EBay and Craigslist. Have a garage sale. This by itself might not be enough for your down payment, but combined with other strategies it could bridge the gap.
4. Change your withholding rate.  Do you normally get a tax refund at the end of the year? Why wait until next year to tap into it? You can change your W9 form at work so that you are claiming more deductions, which means they will withhold less taxes out of your paycheck each pay period. If you put aside the extra money in your check toward your down payment, your savings will grow much quicker. Changing the withholding means you will be ringing up a big tax liability, but this should be more than covered by the tax credit. Make sure you readjust the withholding rate later so you don’t get burned on your taxes next year.
5. Seller credits. You can’t use a seller credit for the down payment, but you can (and it is common in this market) negotiate for the seller to pay for your closing costs and pre-paids so the only money you need to come up with is the 3.5% for the down payment. Make sure you talk with your loan officer before making the offer, so they can put together a good faith estimate showing all the cash you will need, and the correct phrasing will have to be inserted into the contract. With FHA you can get up to 6% of the purchase price credited back for your costs, but the only reason you will need that much is if you have a very small loan amount or are paying points to bring down the interest rate.
6. Lender credits. Again, this can’t be used for the down payment, but if you can’t get the money for closing costs from the seller, you may be able to get it from the lender. As mortgage brokers and mortgage bankers, our compensation often comes in the form of a yield spread premium. This means that the wholesale mortgage companies pay us for bringing them loans. If you are willing to pay a higher interest rate, your lender can use some of the premium to pay for your closing costs. This is something that is commonly used for refinances, but it could be used for your purchase, too. Ask your loan officer if this is an option.
7. Look deep. You may have money you don’t even know about. A few years back I found out I had money from a closed out bank account I never knew about. Check on the Cash Dash site (in Illinois) to see if you have money there. Check other ways too. Do you have savings bonds you’ve never cashed in? Or maybe you have an insurance policy with a cash value? Coming up with a down payment will take more than looking for coins between the cushions, but you may have money you haven’t even considered.
8. Get serious with your savings. If your life depended on it and you absolutely had to come up with a certain amount of money by a certain date, could you do it? If buying a home is a goal, and getting it done on time pays you an extra $8,000 you have a real incentive to get serious about saving. Think of what things you can do without to increase your savings. Maybe it is kicking a Starbucks habit, or canceling your cable. There are usually ways most of us could cut our spending if we needed to.

Each of these on its own may help, but combine several of these ideas, scrounge around and get creative, and you might be surprised that you are closer to coming up with the down payment than you think, and closer to owning a home of your own.

There are lots of ways to buy without having a lot of cash. Use your imagination and you can come up with some more ways to come up with the down payment.

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