20% Down Alternatives | Scrimping, Saving, Selling, and Everything In Between
May 15, 2020
Earlier in this series, we talked about alternative mortgage products that don’t require 20%, or using gift money or dipping into your 401k or IRA accounts to gather that lump sum that’ll put you on the path to home ownership.
But let’s be real. Those options aren’t open to everyone. So what do you do when you absolutely need 20%, whether it’s a financial numbers game or maybe you found that perfect co-op and the board won’t budge on the down payment? You have options, but a lot of them come down to two things—the amount of time you have and the amount of risk you can tolerate.
Realty Collective founder Victoria Alexander knew she had to take some risks if she wanted to own her piece of Brooklyn—in this case, her first place in Red Hook—but she had nowhere near 20% saved. In short order, she decided to: 1) sell her car, 2) sell her engagement ring, 3) take on bartending shifts, and 4) ask her parents to cosign her loan.
Assessing Your Risk Tolerance
In Victoria’s case, her gambit worked—and she continues to build equity by owning a home in a city where the home values continue to skyrocket. But she’s careful to emphasize that she’s a risk-taker. As a business owner, she’s used to acting on a mixture of instinct and calculated risk and this isn’t necessarily the path for everyone.
We’re also inspired (particularly as we’re seeing our world rocked by COVID-19) by our agent Tina Fallon’s thoughts from this 2018 Buying Into Brooklyn session, where she made clear that one of the surest ways to build wealth for yourself is by getting to that first rung on NYC home ownership. Sometimes risk doesn’t seem as scary when you can put it in perspective.
So if living with calculated risk is comfortable for you, here are some actions you can take to get to 20% quickly:
- What can you sell? In Victoria’s case, it was her car (and Brooklyn is a great place to live car free) and engagement ring
- Are you willing to dip into non-traditional sources like your IRA or 401k?
- Is there anyone in your life who would be willing to become a co-signer?
If you prefer less risky scenarios, consider these options and 20% down alternatives:
- Look into down payment assistance programs like the National Homebuyers Fund
- Pay less than 20% and get supplemental private mortgage insurance (PMI)—but know this can significantly up your monthly payment, so be sure to make sure it’s still within your budget
- Pay less than 20% for your down payment; in fact, some pros argue 20% is riskier than a lower down payment because it eats into your more immediate return on investment if you have to sell within a few years (and while a home value decrease in NYC is rare, it’s not impossible).
- Earmark expected money and commit to putting it toward your down payment. Tax refunds or birthday or holiday money are perfect for this.
- Check your reward options on your credit card to see if any of them are (or can be switched to) cash-back options.
- In addition to strict budgeting (we’re fans of You Need a Budget which features a 34-day free trial and a zero-balance budget approach different from some other budgeting apps), also look into passive saving. Many banks now offer options like rounding up your purchases and automatically depositing it in a savings account. If you prefer to set your own rules, we like the passive savings app Qapital, which also allows you to direct savings to different “goals,” meaning you can save toward down payment while also filling up an emergency or vacation fund, for instance.
- Think about what you can cut. You might even be surprised by what you’re paying for. Methodically check your account debits on your bank’s website and also all your credit card charges. $10 streaming channels and $15 beauty box subscriptions add up.
- Pick up extra money when you can—whether that means extra work at your day job or taking on some gig work. So long as you can strike the right balance for your sanity and have a specific end goal, it can be a good short-term option.
- If all else fails, look where you can cut costs, even if only for a month or two..