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For Sale by Owner Guide

Guide for Buyers

See all Buyer Guide topics

Your Down Payment

Minimize the Amount of Cash You Need

It's difficult to save enough cash to buy a home. The most common reason stated by renters for not owning a home is lack of enough cash for the down payment, closing costs, prepaids and reserves. However, there are many strategies to minimize the cash you need to buy a home. It is possible to buy with only the down payment and wrap closing costs and prepaid expenses into the transaction in various ways.

The first step to minimizing the cash needed to purchase is to get a good grasp on exactly what the costs will be. It is very helpful to obtain a Good Faith Estimate from a lender to verify these numbers. A lender will be happy to provide an estimate if you pre-qualify for a loan. Figure out how much money you would need if you were going to pay all the costs yourself, then you'll know what you have to cover.

The first place to start cutting your cash requirements is with the lender. Take a zero point interest rate. That means the lender charges you a slightly higher interest rate, but no discount points or origination fee. With today's low interest rate environment, a zero point loan is still a fairly low rate.

The second place to find cash is with the seller. It is easy to negotiate for the seller to pay your closing costs. The seller is interested in what they will net from the transaction. Let's say the house is on the market for $180,000. You think the seller would take $175,000. You need $3,000 to cover your closing costs and prepaid expenses. So, offer the seller $178,000 with a $3,000 credit toward your closing costs and prepaids. The seller nets his $175,000 and pays your costs.

Need to cover more? Let's look at that interest rate again. Let's say that today's rates are 7% with 2 points or 7.75% at zero points. Some lenders can offer an even higher rate and actually give you cash back toward your closing costs or prepaids. For instance, in the above scenario, you can get 7.75% for zero points, but if you will pay 8.75%, the lender will credit you with 1.75 points toward your costs. These types of loans are called "overpar" or "no closing cost loans." Even though you pay a higher interest rate, that interest is deductible and, in today's interest rate environment, even an "overpar" rate is still low. The difference in your monthly payment will be very small, but the difference in cash needed is significant.

Acceptable Down Payment Sources

Bank Accounts

Your bank account is the first place you should look for down payment money. It is easy to cash out, and it doesn't earn much interest relative to borrowing rates.

Investment Accounts

Most investment accounts are easy to liquidate, but you may want to hold on to your bonds and employee stock options until they mature.

Retirement Accounts

Many retirement accounts allow you to borrow against them when you are buying a house. However, this increases your debt and therefore lowers the amount you can borrow to buy your new home.

Real Estate

If you have sold (or plan to sell) your house, investment property or vacation home and plan to use the proceeds for a down payment, don't forget to subtract transaction costs and the amount that you still owe to lenders and the IRS.

Transaction Costs

When lenders look at the proceeds created by the sale of a property, they usually take 10% off for transaction costs. So, if you sold a $100,000 house, they would only count it as a $90,000 asset.

This accounts for a range of fees including the standard 6% real estate sales agent fee. If you sold it yourself, they'll deduct less.

Outstanding Balances

To determine your outstanding balance subtract all transaction costs and any outstanding mortgage payments from the gross proceeds of your sale (gross proceeds - transaction costs - outstanding mortgage payments = outstanding balance). Note: don't forget those any prepayment penalties if you bought the house recently.

If you're not sure, check your mortgage agreement to see if you opted for a prepayment penalty. If so, it is usually in effect for 3 years after the purchase.

Capital Gains Tax

In August 1997, the federal government made major changes in the way the profits from the sale of homes are taxed. To determine the tax on the profit from the sale of a house sold after May 7th 1997, you need to calculate the profit and know how much of the profit is tax exempt.

Real Estate

Real estate is one of the least liquid assets, but most people can't afford to own two houses at one time. Regardless of whether it is a savings account, checking account, or money market account, lenders see bank accounts as highly liquid assets.

New Deposits

Money hidden under your mattress and recent large deposits can only be used for a down payment if you can document where you got the money.

If the deposit is a family gift intended for the down payment, be sure to get a "Gift Letter" documenting it.

The lender's fear is that this large sum of money that magically appeared came from a borrowed source. If the house is purchased with borrowed money, that would raise your debt ratios and means that, effectively, none of your own money would be in the transaction. The lender is also concerned with whether the new money is illegal money, because if so, the government can take the house and the lender is out of luck. Most lenders are insured against such things, but they still want to avoid laundering money.

Joint Accounts

If you have a joint account with your spouse, you can count the entire balance as an asset. A joint account with any other person, even if they are buying the house with you, can only be counted as an asset if you get a letter stating that you have access to the full amount from the other holder of the account.


If you close a certificate of deposit account (CD) before it matures, you will be charged a penalty. Often, this will mean that any accrued interest will be lost.

This is not the end of the world if you just opened the account, but if it's two months from maturity, you might want to reconsider cashing it in.

Investment Accounts

If you decide to cash in your investments, be realistic about how much cash they will generate for your down payment. This means making conservative assumptions about the performance of your portfolio and taking into account the cost to cash it in.

Stock Options

Stock options usually have a low initial value and have the potential to be worth quite a bit more in the future. This can make selling them a last resort.

Savings Bonds & Treasury Notes

With a savings bond, early redemption will cause you to lose some accumulated interest. You need to make sure that cashing in a savings bond would significantly change your down payment amount enough to make it worthwhile.

A treasury note is not liquid. If it hasn't matured, you can't use it. A mature note can be used, but make sure that you don't renew the note before you try to sell it.

If you have any savings bonds or treasury notes that you would consider selling for the down payment, count their redemption value.

Borrowing Against Investments

Lenders know that by increasing your debt you have less money each month to pay your mortgage. So if you would prefer to borrow against your investments rather than selling them, remember that the added debt lowers the size of the mortgage that you can qualify for.


With a 401k, you can usually use 100% of your personal contribution and about 50% of your employer's contribution for a down payment.

There are two basic ways to draw on your 401k:

Withdraw the Money

If you choose to do this, be aware that you have to pay a tax penalty, and that your participation in your company's 401k program may be suspended for as much as 1 year. Given this penalty, this is generally not a good idea.

Take a Loan

You can use your 401k as collateral for a loan to buy a house. This loan can only be for up to 50% of the vested amount in your account. Usually, you can only take out one loan on your account at a time, so if you are planning to borrow against it for your kids' college tuition or need the security of having that money around in case of an emergency, don't use it now.

Also, know that if you change jobs and don't roll over the account, you may have to pay the loan back immediately, or it will be counted as a withdrawal and will be taxed.

Remember that if you borrow against your 401k, you will have to make payments on the loan, which decreases the amount cash that you have available for your mortgage payment.


IRA accounts can be a little more complicated than 401k accounts. Many allow you to withdraw up to $10,000 to buy a first home, but it's often only after you have held the account for a few years.

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