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How to Come up with a Down Payment for a New Home

So you’ve found made the decision to buy a house, and now you need to get the cash together for a down payment. While it sounds easier than it actually is, you can come up with the money using discipline and other strategies. The key is to be realistic about your finances. You also want to start saving early, because it can take years to come up with a sufficient down payment.

How much cash do you need?

One of the biggest changes in today’s housing market is that you need cash, and lots of it. Because zero-down loans are pretty much a thing of the past, you will need at least three and a half percent for a cash down payment. While it sounds like a lot, consider the fact that home buyers needed 50% cash down to purchase a house during the Great Depression! If you want to buy a house that is around $200,000, you’ll need $7,000 cash for a down payment. Don’t forget cash reserves for housing expenses during the first few months as well as closing costs.

Sources for down payment and closing costs

  • Savings
  • Investments
  • Home equity
  • Gift funds
  • IRA distribution
  • Down payment assistance programs

Where to stash your cash until it’s time to buy

First, make sure your down payment cash is “short term” cash. In other words, short term cash is money that you’ll need to use within three to five years. When you need to use all of your short term cash for a down payment, you have to make sure that the funds are put in an investment that is extremely safe, and that you don’t expect to earn any returns.

Here are some safe options to investing your down payment cash:

Savings account- While you’ll earn more interest with a savings account than with a checking account, your bank may require you to have a minimum amount invested to earn the top interest rate available.

Money market account- They pay slightly more interest than regular saving accounts, but you may be limited to a small number of withdrawals per month. But the cash is there whenever you need it.

Certificate of deposit- Be sure you know the rules of the CD before you buy. If you will need the cash in the next five years for a down payment, CDs are a great way to invest your money in.

When you have come up with the down payment and you are ready to sign the papers, you should now the value of the property you are purchasing. You can get a free home valuation report from Neighborhood IQ to find out your home’s true worth so that you know you got a good deal.

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