How To Buy A House When You’re Pretty Sure You Can’t Afford One

The obstacles to buying a first house may appear insurmountable: Home prices have risen, mortgage interest rates are poised to rise, and by most people’s definition we’re in a market that favors sellers.

But for many who think they can’t afford the American dream of owning your own home, there’s some good news: You probably can ― and in a place you’d actually want to live.

Here are six problems that, despite what you’ve heard, don’t have to stand in the way of home ownership.

Problem 1: You don’t have the 20 percent down payment.

Maybe you’re still paying off student loans or living paycheck to paycheck. Your savings account is simply not that full.

The gold standard in buying a house is 20 percent down ― that is, you pay 20 percent of the purchase price upfront. But that doesn’t mean you can’t get a mortgage with a smaller down payment. You can very often pony up much less ― even as little as 3 percent.

And you won’t be alone. According to the National Association of Realtors, 81 percent of Americans purchase their first home with less than 20 percent down.

Paying less upfront has its disadvantages: You’ll need to take out a larger mortgage, obviously. When you put up less than 20 percent, the mortgage lender can also require you to take out private mortgage insurance. But the difference between 20 percent and 3 percent on a house selling for $300,000 is the difference between $60,000 and $9,000. Sounds more doable already, doesn’t it?

What if you’re still coming up short? The solution for many young adults is to tap the Bank of Mom and Dad for a gift.

Your generous donors have to pay gift tax on any sum above the federal exemption limit for that year. The limit for 2017 is $14,000 from one person to another. That means Mom can gift you and your partner $14,000 each and Dad can do the same, which amounts to $56,000. Grandma and Grandpa could also chip in.

If you’re putting down 20 percent or more on a mortgage that’s backed by Fannie Mae or Freddie Mac, the whole down payment can come from a gift. But if your down payment is less than 20 percent, some of that money has to be your own.

Another option that is gaining in popularity, according to a recent study by ATTOM Data Solutions, is to ask Mom and Dad or another relative to co-sign the mortgage with you. Assuming their credit score is good and they have income and assets that boost your mortgageability, you could obtain a loan with less money upfront. The risk here is that if you miss a mortgage payment, their credit will be affected as well as yours ― and if you stop paying entirely, the bank will come after them.

The report found that 22.8 percent of all purchase loan originations on single family homes in the second quarter of 2017 involved co-borrowers listed on the mortgage or deed of trust, an increase from 20.5 percent during the same period in 2016. Among 42 cities with at least 1,500 such loan originations, those with the highest share of co-borrowers were San Jose, California (50.9 percent), Miami (45.2 percent), Seattle (39.1 percent), Los Angeles (31.1 percent), San Diego (29.4 percent) and Portland, Oregon (28.8 percent).

But since not everyone has parents who can or want to fork over financial help, here are some other places to look for down payment money:

Pull from your 401(k) or IRA assets. You may be able to borrow up to the lesser of $50,000 or 50 percent of your 401(k) plan balance, and first-time homebuyers may qualify to take up to $10,000 from an IRA without paying early withdrawal penalties. Be advised, though, that not all plans permit borrowing, and tapping into these resources so soon is likely to slow down your accumulation of retirement savings. Also, you will have to repay your 401(k) ― and some IRAs. Beware that some 401(k) plans require immediate repayment if you leave your current employer.

Skip the big wedding. Although most Americans spend less than $10,000 on their wedding, some people are dropping $20,000, $30,000 and much, much more. The money you don’t spend on one day of celebration could make a substantial dent in your home down payment. A spinoff idea is to create a “wedding registry” that suggests money to buy a house instead of dishware that you already have. For instance, HoneyFund, which calls for honeymoon donations, can also be used to collect money for a down payment.

Play the first-time home-buyer card. There are federal, state and local programs that help would-be homebuyers qualify for loans or offer them grants toward their down payments. Fannie Mae and Freddie Mac have options that can ease the way for borrowers with a wide range of incomes. Even the U.S. Department of Agriculture offers a helping hand to some first-time homebuyers, just in case the rural life appeals.