Prior to 2008, sellers could contribute up to six percent of the purchase price as a kind of down payment for buyers. That option and a number of down payment assistance programs that were formerly available for homebuyers are now, by law, forbidden.
Learn how to buy a new home with no money down.
1. Save! Obviously, the first option for any homebuyer is to accumulate savings toward that home purchase. You should have savings not only for the down payment but also for emergencies, which will certainly happen once you are a homeowner. Calculate the mortgage, taxes, interest and repair fund for a home in the price range you want. If that amount is more than your monthly rent, start saving the difference. This will build your down payment and act as a kind of test for whether you are prepared to give up the morning coffee, dining out or other extras to be a homeowner.
2. Gifts. If you can’t earn it, maybe someone can give it to you. The money that might have been spent on a big wedding could well be used for a down payment on a new home. Gifting has tax advantages for the giver and recipient according to a New York Times article, which acknowledged that lack of a down payment is the biggest obstacle to first time buyers’ home purchases. The Times reported that an individual could receive up to $13,000 of nontaxable income in a calendar year. That means that you and your partner could receive $26,000 (even $52,000 if you both had relatives to make contributions) in nontaxable income. In the alternative, you could borrow the money from family at micro interest and have it forgiven later, but you will be taxed on any amount forgiven over and above the $13,000 per year. People generally gift like this to avoid estate taxes later.
3. Borrowing from a 401(k). If you have a 401(k), you may well be able to borrow from those funds for a down payment for your new home. The risk is that you might leave your job before you repay the funds. Then, within a short window of time, the withdrawal will be considered a distribution potentially subject to taxes, penalty and interest, depending on your age at time of separation.
4. Withdrawing from your Roth or Traditional IRA. When you contribute to a traditional IRA, you defer taxes on the contribution. You pay taxes on Roth contributions. The difference is reflected in withdrawals for down payments. You may be able to withdraw up to $15,000 from a Roth IRA before age 59 ½ for a home purchase without penalty or taxes. The limit on a traditional IRA is $10,000, and you’d have to pay taxes on the money withdrawn.
5. All of the Above. Obviously, if you can do one, you have the potential to do all of the above. Then, you will spread or reduce your risks.
Please be sure to consult an accountant before you make tax-related decisions.