Millennials are onto something: creative ways to save a down payment

Erik J. MartinThe Mortgage Reports Contributor

September 20, 2018 - 6 min read

In this article:

Think you can’t save a down payment for your home? Stop reading those articles about giving up coffee and see how the latest generation is kicking the landlord to the curb and buying their homes.

Some are taking advantage of today’s sharing economy
Some have side gigs
And others are seeking help from family, friends and employers

In addition, there are programs that require very little down, so cracking that nut may be easier than you think.

Verify your new rate (Jun 11th, 2022)

Beating the down payment blues

For younger buyers, saving up for a down payment is hard work. That’s because many are saddled with student debt. Also, wages have remained stagnant. And home prices continue to rise, making it tough to come up with the minimum amount to put down.

But new research shows that millennials are trying various and resourceful tactics to meet this goal. Experts recommend some of these strategies and discourage others.

If you’re determined to buy a home, consider these and other save-for down payment methods.

What the research found

Redfin recently polled folks who planned to buy or sell a home in the next few months. Over a quarter of those surveyed were 24 to 38 years old; they said they were planning to buy their first home in the coming year.

The top worry among this age group? Saving enough for a down payment, cited by 50 percent. Their most common route to a down payment? Money saved directly from paychecks (69 percent do this).

Save down payment strategies beyond the norm

Saving money from paychecks is far from the only approach used by millennials today. Other save a down payment actions they’ve taken, per the Redfin survey, include:

Work a second job (36 percent)
Receive a cash gift from family (24 percent)
Sell stock investments (13 percent)
Pull money out of retirement funds early (13 percent)
Pull funds from an inheritance (12 percent)
Contribute less to retirement savings (12 percent)
Sell cryptocurrency investments (10 percent)

Also, the survey asked how these buyers plan to afford their mortgage. Among the answers given, which could presumably also apply to save for a down payment, were:

Drive for a ride share service (15 percent)
Split ownership with roommates/friends (14 percent)

Worthy strategies

Many pros concur that some of these methods are better than others.

“Taking a second job is worthwhile toward a goal like saving for a down payment. Hopefully, the second job allows you to learn new skills to add to your skill set,” says real estate attorney and Florida International University instructor Suzanne Hollander.

Keith Baker, Mortgage Banking Program coordinator and faculty at North Lake College, agrees.

“It’s a good idea if you can ensure that your work performance at job number one doesn’t suffer,” he says.

In addition, asking for and taking a cash gift from a family member is recommended.

“This is fabulous if you have relatives in the position to help,” notes Bruce Ailion, Realtor and real estate attorney.

Of all the options listed, “this is the best,” says Robert R. Johnson, professor of finance at Creighton University’s Heider College of Business. “But you might be even better off investing a cash gift or inheritance into an account for retirement.”

Down payment gift considerations

In order to finance a home with a gifted down payment, you’ll need to consider a few things. First, you’ll need to prove that the money is a gift and that you did not borrow it or get it from an unapproved source (anyone who stands to profit from the transaction, like the seller, lender or real estate agent, for instance).

That means the giver must provide a copy of the account statement for the source of funds, to prove they have the money to give. You’ll also want to provide a record of the transfer to your account, or the withdrawal if they put the money directly into escrow.

Finally, you’ll need a “gift letter” from the provider, telling the world that the money is, in fact, a gift and that repayment is not required.

There may be tax consequences to especially-generous givers. For 2018, parents who are married and file a joint return can gift up to $30,000 per child for a mortgage down payment before gift taxes kick in.

Bitcoin and other cryptocurrencies

Selling off cryptocurrency, like Bitcoin, is also strongly urged, but only if you know the risks and rewards of this new unregulated currency.

“This is a good idea if you are lucky enough to make a profit. There are risks and no guarantees with cryptocurrency,” says Hollander, noting that these investments are highly speculative and chancy.

Tactics to think twice about

The pros advise skipping other schemes to save a down payment. For example, many frown upon tapping into or contributing less to your retirement savings.

“Pulling money out of retirement funds early is the worst of the options listed. This should only be a last ditch option, but never an option for a down payment,” Johnson cautions.

“Furthermore, when it comes time to retire, you will have accumulated too little funding. That means you either have to continue working longer or live a more spartan lifestyle.”

However, there are advantages to borrowing your down payment from your 401(k), because you are borrowing from yourself. So the loan doesn’t count in your debt-to-income ratios when you apply for a mortgage.

However, draining your retirement savings “can trigger negative tax consequences,” says Baker. Withdrawals count as ordinary income, so they are taxable. And there is a 10 percent penalty on top of that if you’re a young buyer.

Thinking of selling off stock investments? Research suggests that it’s better to put money into the stock market than real estate.

“One study shows that a $100 investment in an average home had grown to nearly $500 between 1975 and 2013. But the same $100 invested in the S&P 500 would have grown in value to $1,600,” Baker adds.

On the other hand, you still have to live somewhere...

Co-ownership pitfalls

Although co-ownership can allow you to qualify for a mortgage you otherwise could not afford, there are pitfalls to watch out for. Be careful when splitting ownership of your future home with a friend, roommate or non-spouse.

“Remember that all owners are liable jointly and severally (individually) for paying the mortgage, property taxes and other expenses like maintenance and repair. This means that if your friend stops paying his share of the mortgage, the rest of you will have to pick up the tab,” says Hollander.

“What if one friend wants out or wants to sell their share to another? What if everyone but you wants to sell?”

Hollander says you can own property with friends; just make sure to get these questions answered in writing, preferably in an operating agreement or partnership agreement written by an attorney.

Getting someone else to pitch in on the down payment and co-own with you is risky. But it could work with the right planning. “Make sure you have a written co-ownership agreement that sets out the roles and obligations of each owner,” Baker says.

Other ideas

These aren’t the only options you can pursue to save a down payment. In addition, ponder these tips:

Pursue a low-down-payment mortgage loan. For instance, an FHA loan can require as little as a 3.5 percent down payment.
Explore down payment assistance programs. The Mortgage Reports offers a Complete Guide to Down Payment Assistance in the US that covers every state.
Unload your pricey possessions. In other words, “consider selling your unused stuff of value on eBay,” adds Ailion.
Ask the boss for help. “Ask your employer for a bonus to buy housing that’s closer to work,” Ailion suggests.
Try a rent-to-own home. In this scenario, you lease a home for a set amount of time and have the option to purchase it before the lease ends. This may buy you time to save for a down payment.

With all the options available today, most people who want to dive into homeownership should be able to take the plunge.

Verify your new rate (Jun 11th, 2022)