Buying a home in Kansas City is an expensive proposition – the biggest investment that most families ever make. While you aren’t required to cover the entire purchase price up front, you do need to come up with a substantial amount of cash before you can close on your new home.
A common question that most people ask me is, “How much money will I need to buy a home in Kansas City?” It’s a valid question for sure, so here’s some things to consider.
Shrink Your Required Down Payment With a Special Loan
If you doubt your ability to save for a 20% down payment on your new home, look into special loan programs with lower down payment requirements.
Some of the more common special loan programs are listed below. Other options exist, so check with our lender to learn what’s available for families in your area and circumstances.
- FHA Loans. FHA mortgage loans are insured, but not originated, by the federal government – specifically, the Federal Housing Administration. Known as 203b mortgage loans, they require just 3.5% down. They can typically carry lower interest rates than conventional mortgage loans, though your exact rate will depend on your creditworthiness and other factors.
- VA Loans. If you or your spouse is a current or former member of the military, your family may qualify for a VA home loan backed by the federal government (Department of Veterans Affairs). On the down payment front, VA loans are even better than FHA loans – they require no money down, though you’re free to put money down and reduce the total amount you must borrow.
- USDA Loans. If you’re buying a home in a rural or outer suburban area, you may qualify for a USDA loan, another type of federally insured loan designed to bring housing within reach for lower-income country-dwellers. Unlike FHA and VA loans, USDA loans are direct loans – they’re made by USDA itself.
- Conventional 97 Loans. Conventional 97 loans are just as they sound: conventional mortgage loans that let you put as little as 3% down, for a maximum LTV of 97%.
Beyond program-specific requirements, these special loans have some important drawbacks. Perhaps most importantly, they carry private mortgage insurance (PMI). Although you can get a conventional loan with only 5%, 10%, 15% down, you’ll need a full 20% down to avoid the PMI costs.
Set Aside a Portion of Your Tax Refund
Expecting a tax refund this year? If you typically receive a $3,000 refund, you’ll have $6,000 after just two years, and $9,000 after three. This may not account for your entire down payment, but it can’t hurt.
Make Recurring Savings Deposits
Knowing you need to set money aside each month to save for your home downpayment is one thing. Actually doing it is another. Set yourself a calendar reminder on the same day each month or pay period to transfer a set amount of money – at least 5% of your take-home pay, and ideally 10% – into your primary savings account. Or, better yet, create a separate savings account whose sole purpose is to hold your down payment funds.
Withdraw from Your IRA Without Penalty
Under certain conditions, your retirement account can serve as a supplemental funding source for your down payment. Specifically, if you’re a first-time homebuyer, you’re permitted to borrow up to $10,000 from a traditional or Roth IRA without penalty to fund your down payment.
This isn’t free money, of course. If you have a traditional IRA, you need to pay taxes on the withdrawn amount at your overall rate – 28% in the 28% bracket, and so on. On a Roth IRA held for longer than five years, your withdrawal is tax-free, because you’ve already paid taxes on the contribution.
If you and your spouse both have IRAs, you can both withdraw up to $10,000, for a total of $20,000. Depending on the projected size of your down payment, that could be a sizable boost.
Take a 401k Loan
You can also borrow from employer-sponsored 401ks to fund your down payment. On 401k loans, borrowing limits are much more generous: You can borrow up to the lesser of $50,000 or half the value of the account.
However, there is a downside. You have to pay back your 401k loans, with interest – typically at 2% above the prime rate. On larger loans, that means several years’ worth of three-figure monthly payments. Plus, if you take out a 401k loan before applying for a mortgage loan, your credit utilization ratio will spike, which could raise your mortgage loan’s interest rate or cause the bank to think twice about lending to you in the first place, so please speak with our preferred lender first.
As a general rule of thumb, 401k loans are best used for funding small down payments ($10,000 or less).
Earn Extra Income on the Side
If your take-home pay won’t get you to your down payment goal on your desired timeframe, or you’re worried about negatively impacting your lifestyle as you scrimp and save for your dream home, consider increasing your income by taking on a second part-time job. Ok, so nobody wants to work 12 hours a day, but it’s only for a short period of time.
Borrow from a Family Member
If you’re lucky enough to have a family member agree to chip in and pay for part of your down payment, there are some guidelines you’ll need to follow so make sure you speak with our lender first. Many first time home buyers use this option and then make arrangements to pay their family member back over time.
For 2018, the annual gift tax exclusion is $15,000. This amount applies to each recipient, and each spouse can give this amount tax-free. The maximum amount parents could give a child without incurring gift-tax liability would be $30,000 if each partner gave $15,000 to both their child and the child’s spouse.