Homebuyers

Down Payment Stacking: How to Combine Funding Sources to Buy a Home

Many would-be homebuyers face a frustrating scenario: You’ve found a home you want in an ideal neighborhood. Your income, debt, and credit score are strong enough to qualify for a mortgage. And you could comfortably cover the monthly housing payment.

But you don’t have enough money saved for the down payment and closing costs. That’s where the concept of down payment stacking may be able to help.

“They remain a significant barrier, especially for first-time buyers,” said Nadia Evangelou, principal economist at the National Association of Realtors (NAR) of down payments. “Our latest data…shows that 31% of first-time buyers said saving for the down payment was one of the most difficult steps in buying a home.”

Instead of relying solely on your savings, you may be able to combine several sources of help, including down payment assistance programs, gift funds, and seller or builder concessions.

Here are several options to help you come up with the needed funds to purchase a home.

What is down payment assistance?

Down payment assistance (DPA) programs can provide money you can use for a down payment and closing costs. They’re typically offered by government agencies and non-profit organizations, although some employers may offer them as well.

Eligibility for these programs varies and some may run out of funding due to their popularity. Many don’t require applicants to be first-time homebuyers, and those who earn six-figures may be considered, depending on the program.

Down payment assistance typically comes in two forms:

• Grants: These are funds you don’t have to pay back. The money can go toward some or all of your down payment or closing costs. There’s no loan agreement for you to sign, and you don’t have to put up your home as collateral.
  
  
• Loans: Some DPA loans work like a low- or no-interest second mortgage. Repayments may begin immediately or after a set period. Terms vary depending on the loan program. Some are deferred loans that don’t have to be repaid until you sell or refinance the home. Others offer forgivable loans that don’t require repayment if you follow the program’s rules, such as living in the home for a certain number of years.

How to apply for down payment assistance

Follow these steps to apply for down payment assistance:

1. Search down payment assistance programs: You can search for programs on Down Payment Resource or your city, county, or state housing finance agency. Local non-profits and some mortgage lenders may also participate in down payment assistance programs.
   
   
2. See if you qualify: Check the program’s income and other eligibility requirements. You may qualify as a first-time buyer if you haven’t owned a home in the past three years and some programs allow for repeat buyers.
   
   
3. Apply through an approved lender: Confirm that your lender works with the program you chose and then follow the program’s instructions to apply.

What are seller concessions?

Seller concessions are when the home seller agrees to pay some or all of the buyer’s closing costs and fees.

While concessions don’t directly add to your down payment, they reduce how much of your savings you’ll need for closing costs. This can help you put more of your savings toward the down payment.

“Buyers are more likely to have that negotiating power in markets where inventory has increased, and homes are taking longer to sell, especially in parts of the South and West,” Evangelou said.

Using gift funds for your down payment

Gift money is another commonly used source of down payment funds. Among those who made a down payment, 22% used gift funds from family or friends, according to NAR data.

You may be able to use gift funds for a down payment, but your lender will require paperwork showing where it came from and how it was transferred.

“For mortgage purposes, tell the lender before moving the money. Expect a gift letter and documentation showing the source and transfer of funds,” said Thomas Ravert, a financial advisor and author of “The Rudiments of Real Estate” series.

Stack your savings with bonuses, tax refunds, and side hustles

You can boost your savings by combining what you regularly save with money from other sources, such as bonuses, tax refunds, unexpected windfalls, and side jobs.

Accelerate your savings timeline by putting unexpected income, like an inheritance, toward your down payment. Consider earning extra cash from a second job or a side gig until you reach your goal.

You might also consider stashing your savings in an account that earns more than a traditional savings account. For a short-term goal, Ravert recommends keeping your money liquid in a separate money-market or high-yield cash account and setting up automatic deposits every payday

“As the purchase date approaches, however, I would reduce market exposure and protect the money needed for closing,” said Ravert.

Explore low down payment mortgages

A low- or no-down-payment mortgage can help you clear the down payment hurdle by reducing how much you need to save before you can buy a home.

You may be able to put down just 3% with a Conventional loan or 3.5% with a Federal Housing Administration (FHA) loan.

You could qualify for a no down payment loan with a U.S. Department of Veterans Affairs (VA) loan if you’re an eligible veteran, service member, or surviving spouse. You may be able to buy a home without a down payment with a U.S. Department of Agriculture (USDA) loan if you’re an eligible buyer outside of a major city.

You may even be able to combine down payment assistance with an FHA loan to buy a home with a 0% down payment.

While a larger down payment would lower your monthly mortgage payment and may help you avoid mortgage insurance, putting less down may leave you with more cash for emergencies.

“I would generally rather see a buyer put less down and maintain adequate reserves than put every available dollar into the house,” Ravert said. “You can always make additional principal payments later.”

The lowdown on down payment stacking

You may be able to buy sooner by combining your savings with down payment assistance, gift funds, or concessions.

A loan that requires a lower down payment, or no down payment at all, may also reduce how much you need to save and leave you more in cash reserves for emergencies.