How You Can Buy Your Dream Home When Your Savings Comes Up Short

16 January 2017
 Categories: Real Estate, Blog


If you've found a home that seems perfect for your needs, don't let a lack of savings keep you from your dream property. Instead, check out some of the ways you can get into the home of your dreams when your savings account falls short.

Rethink Your Mortgage 

Conventionally, the best mortgage terms and the highest chances for loan approval require a down payment of 20 percent of the purchase price of the home. However, there are numerous loan products out there for buyers who need to put a smaller down payment down.

The FHA mortgage is one of the most popular alternatives for buyers with a small down payment. This option allows down payments as low as 3.5 percent, and the credit requirements are less stringent than those for conventional mortgages. One downside to FHA loans is that there are loan limits, and they may not fund mortgages on properties that require extensive repairs.

Another possibility is to pay private mortgage insurance (PMI). When a borrower doesn't have 20 percent for a down payment, lenders often require that they pay PMI. Though paying PMI does increase your monthly mortgage payment, it also lets you stretch your purchasing power.

If you have good credit and verifiable income, you may be able to put down a smaller down payment in exchange for a higher interest rate. Some mortgage companies permit well qualified buyers to select this option instead of having to pay PMI.

Run the numbers to see which type of loan minimizes your interest expenses and fees while allowing you to have the purchasing power to buy your preferred home.

Tap Your 401(k)

If you have a 401(k), you may be able to take out a loan to help pay for your new home. The kind of 401(k) plans that permit loans usually extend the longest repayment periods to loans that are used for home purchases.

Since a 401(k) loan is not reported on your credit, it will not affect your debt-to-income ratio. Another benefit of 401(k) loans is that they have favorable interest rates. You are also paying interest to yourself, rather than to a lender.

Prospective home buyers who are purchasing their first home do have the option to take up to $10,000 out of their 401(k) without penalty. However, even though they do not have to pay the 10 percent penalty for early withdrawals, they still have to pay state and federal income taxes on the money. Another downside to this alternative is that they also miss out on years of compounding interest; the amount of the withdrawal has the potential to be worth tens of thousands of dollars more when it is time to retire.