How to Grow Your Down Payment?

We’ve talked about where to find your hidden down payment and also side gigs to earn extra money.

One thing we still need to explore is how to GROW your down payment.

It’s one thing to work extra hard to find that extra chunk of cash, but it’s another to figure how to grow that chunk of cash to hasten the process of accumulation.

Beat tax and inflation

This is the Wealth Formula…the mother of all formula that every investor needs to know.

After doing all those things discussed about finding that extra chunk of cash for down payment, we need to explore the rate of return.

Time you have limited control. The only thing you can do is ACT NOW!

But where you should park your money now while you save?

Tax now

Tax now…

Brokerage account

Certificate of deposit

Checking account

Savings Account

Tax later

Tax later…




Thrift Savings Plan (TSP)

Traditional IRA

Tax never

Tax never…

Be Your Own Bank  (life insurance)

Health Savings Account



Where can you save that can give you the most bang for your bucks?

You want good rate of return to beat inflation of 3.3% each year

Related article: Is Your Money is Your Savings Account Working Hard for You? Or for Your Bank?

You want maximum tax benefits

You want safety, meaning never lose money!

An indexed universal life (IUL) insurance can provide all these benefits better than IRAs, which limits access to money before age 59-1/2, or HSA, which limits your spending only on health-related expenses.

An IUL lets you capture the upside of the stock market (gain) beating inflation each year, but avoids the down side (loss). So your down payment money grows safely and aggressively with maximum tax benefits.

Learn more at Be Your Own Bank

When you’re ready to pull the trigger to make the purchase, you can take a tax-free withdrawal, keeping your new money in the cash account to continue to grow.

Gift Money or Gift Funds for Down Payment

Gift Money for Down Payment

What You Need to Know…

What You Need to Know About Using Gift Money or Gift Funds for Down Payment

Gift funds for down payment on home purchase is allowed by both FHA and Fannie Mae and Freddie Mac, however, there are rules and regulations with regards to gift funds and each loan program has their own lending guidelines on gift funds. 

Many families help each other out, especially in Hawaii. Gifting money also helps with estate tax later.

A parent may give their children gift funds to purchase a home.  A grand parent may give their grandchild gift funds to be used towards the down payment of their home purchase. A couple may get gift funds as their wedding gift from family or close relatives where they can use that as a down payment for their home purchase.

Why Are Lenders So Uptight About Gift Funds?

Mortgage lenders want to make sure that the gift funds are actual gifts and not loans. If an applicant were to borrow part of the funds required to complete the transaction, that monthly expense would need to be accounted for in their debt-to-income ratio. Mortgage lenders want you successful in making your mortgage payments.

Gift funds do not need to be repaid, so there is no additional burden on the borrower. And it is the only type of financial assistance that doesn’t change the borrower’s capacity to borrow, it has historically been one of the most abused and cheated aspects in lending.

To combat such fraud, underwriting guidelines have been put in place to ensure that the gift fund is in deed a real gift!

Before you accept gift funds for down payment on a home purchase, check with your loan officer for instructions. 

You loan officer will tell you that gift funds for down payment needs to be sourced.  The donor of gift funds for down payment on your home purchase needs to complete a gift letter which states that the gift funds is not a loan and that the gift funds does not need to be paid back. 

The donor of the gift funds needs to provide 30 days of the donor’s bank statement showing that the gift funds was seasoned in the donor’s bank account for at least 30 days. The gift funds leaving the donor’s account needs to be reflected in the bank statement of the donor. 

The recipient of the gift funds needs to provide the copy of the check, the deposit slip, and a new bank transactional history print out that is signed, dated, and stamped by the bank teller reflecting the funds in the bank account of the recipient.

The Gift Letter must contain the following information:

The donor’s name, address and phone number
The donor’s relations to the homebuyer/recipient
The dollar amount of the gift for down payment
The date that the gift fund is transferred to the homebuyer
A written statement from the gift donor’s stating that the fund is a gift and NOT a loan that needs to be repaid.
The gift fund donor’s signature
The address of the property to be purchased.

Gift funds can only be given by a close family member.

The person giving the gift will need to:
§ Sign a Gift Letter that includes their complete contact information and amount of the gift.
§ Provide a copy of the check or financial instrument used to transfer the gift.
§ Provide proof that they themselves had the ability to give the gift (the money was in their account).

The gift recipient will need to provide proof those transferred funds were deposited in an account they hold.

How Much of the Down Payment Can be from a Gift?

That depends on the type of home loans.

For conventional home loans, if you putting 20% down payment or more, then the whole amount can be gifted.

However, if you’re putting less than 20% down, only part of the down payment can be from a gift fund, and the rest has to be from your own fund.

Gift funds for down payment is only allowed on owner-occupied primary and second residences. Gift funds are not allowed for investment property purchase.

What About FHA Loans and VA Loans?

Both FHA loans and VA loans allow 100% gift funds for down payment for home purchase. Both loans are for owner-occupant only.

If you are purchasing an investment property, gift funds cannot be used at all, period.

It is VERY important to note that if gift funds are provided early enough in the process, and those funds have remained in the borrowers own accounts for more than 60 days, no gift funds supporting documentation is required.

Gifts are not restricted to only money. Gifts can also be in the form of equity in a property. If parents wish to have their child purchase a property from them, the parents can gift a portion of the equity to be used as the child’s down payment.

What Else Do You Need to Know About Gift Money…

Gift Tax, sometimes confused with Inheritance or Estate Tax, is a tax on the transfer of cash, asset, property from one person to another while receiving nothing in return, in another word, as a gift.  

In most states, the tax applies whether the donor intends the transfer to be a gift or not.  

The Gift Tax and Estate Tax are closely related.  The IRS allows you to give up to $14,000 per year to any number of people without incurring any gift taxes.

If the gift exceeds $14,000 in a given year, the person who makes the gift, not the recipient, has to file a gift tax return and pay any tax owed. However, there is $5,430,000 lifetime exemption before you have to pay gift tax.

Any gift that exceeds the annual exemption of $14,000 reduces your estate tax lifetime exemption of $5,430,000.  For example, you give your son $114,000 in 2015.   $14,000 is exempted while you have to file a gift tax return and report that you used $100,000 of your $5,430,000 lifetime exemption.

Here’s the good news…

There is NO gift tax in Hawaii.  All Gift Tax are exempt in the State of Hawaii.

If the total estate asset (property, cash, etc.) is over $5,430,000, then it is subject to the Federal Estate Tax.

Find Your Hidden Down Payment

Down Payment

Need some help with down payment? You'll be surprise where your next home down payment may be hiding.

The biggest challenge for most home buyers is coming up with a decent down payment and closing costs.

Whether you’re trying to scrape by with 3.5 percent for an FHA loan or you’re planning to put down a full 20 percent, saving for a down payment might be the largest savings endeavor you ever undertake, after retirement planning.

Don’t let this be the obstacle that stop you from your dream of becoming a home owner. With some looking and creativity, you’ll be surprise that there are money everywhere in front of you waiting for you to grab.

This does involve some work and effort on your side. Hey, nothing’s free in this world. And nothing good is free.

1. Your budget’s biggest line items. Take a look at your top 10 or so monthly expenses, there are almost always at least one or two items that you could do without, that you’ll end up with more cash at the end of each month.

This takes discipline and how passionate you are about becoming a home owner.

I have a friend who moved her whole family back to her husband’s family for 6 months, saving the rent for their down payment for a bigger house. Go from two cars to one car to get rid of one car payment, or down size to a smaller car. Cancel cable services, or switching to a cheaper phone service providers. By the end of the year, you’ll be at least several thousand dollar richer.

2. Your bad habits. Saving for a down payment is a great time to kick your bad habits. If you smoke, that will be the number one habit to kick. First and second hand smoking causing harm to both the one who smokes, and the people around him/her. Not to mention to raising tax on smoking habits. Instead of eating out at restaurants with friends, invite your friends over for dinner. Stopping drinking and buying soda or any sugary beverages and alcohol beverages. These only add to your medical bills in the future. Water is your best friend. But don’t spend money on bottled water either. The plastic bottle contributes to pollution, and erosion of your wallet. Install faucet mount water filter system and refill your own bottle.

Whenever you fill deprive of your old habits, visualize yourself in your dream home. That will help you stay on track on your saving goals.

3. Your stuff sitting around. Do you have extra stuff sitting around that you don’t used? Now is a great time for some spring cleaning to get rid of things you don’t need. You can sell these on eBay, Craigslist, garage sale.

The extra money you make will contribute to your down payment, getting you closer to your dream home.

Think of it this way, when you finally closing on your home, you’ll have to clean anyway, do it now when you have the time and make some money. After all, you don’t want to pay someone to move your junk to your new home, right?

4. Your spare room or extra seats in your car. Millions of home owners worldwide are now renting out rooms or floors of their current homes for short periods of time on sites like Airbnb and VRBO.

Sites like uber and turo allow you to rent out the extra seats in your car - or the whole vehicle, if you’re not too faint of heart!

5. Your skills and time. Got extra time still after selling your stuff? Leverage your earning power during your off-time, evenings and weekends with your professional skills or personal hobbies to bring in some extra cash.

If you love doing crafts, you can sell creative items on Etsy. In Hawaii, many houses have fruits trees in the yards. You can sell the fruits from your tree at local farmer’s market. Do you have a special recipe that everyone enjoys? Sell that at local farmer’s markets.

You can also earn extra money with cooking, house cleaning, babysitting or dog walking. The opportunity is limitless.

You can also list your services on sites like TaskRabbit. You can also sign up for Mechanical Turks at Amazon, where you can complete tiny miscellaneous task for a fee.

6. Your loved ones. Many people are aware of the benefit of owning a home, so most family member are willing to help. If your parent, sibling or auntie has mentioned their interest in helping you with home purchasing, show your gratitude and let them know of your plan. You’ll need to discuss the details, such as their financial contribution, tax or estate planning.

Alternatively, if your home buying plans are timed alongside your wedding plans, graduation plans or new baby due date, consider opening a down payment registry, so well-wishers can funnel their gift funds right into your real estate savings.

In either of these case, you may need to discuss before hand with your loan officer as there are limitations and documentation regarding down payment fundings.

Related article: Money or Gift Funds for Down Payment

Don’t forget you can also team up with BFFs, siblings, parents or other loved ones to buy a place you can jointly own and/or live in. This arrangement might help you and your loved one accomplish your respective financial and real estate goals.

7. Your employer. Some employers actually offer down payment and other forms of mortgage assistance to employee, especially universities and government agencies that requires you to live locally for their jobs (e.g., police, fire and other emergency personnel) often have housing assistance programs that can include down payment funds or access to mortgage programs with lower down payment requirements.

Even if you don’t work for one of these sorts of agencies, touch base with your human resource department to see if there are any relocation benefits that can help you with your down payment you need to make your move.

8. Your city, county or state. Down payment assistance program are available at both state and county levels. Shop around different banks and mortgage company for down payment assistance program because not all banks will do that, and each may have their own areas of specialty.

These assistance programs are usually available to first-time home buyers (person who has not own a home in the area in the last 3 years), low- or moderate-income households, and purchasing home in certain areas, such as the USDA loans for rural home buyers.

A good place to start is the Hawaii Home Ownership Center, which is dedicated to educating and helping first time home buyer. The down payment assistance program usually has limited funding so start your home buying process early.

Check out The DPAL Program

Finally, don’t forget to set up a separate account to stash your savings away and keep it away from your spending money.

There’ll be sacrifices involved. But ultimately it is what’s important to you.

Recently I asked my 15-year-old daughter, “Do you rather have a nice car or a nice home?” She answered, “a nice home”.

So proud of her shrewdness.

Related article: Home Buying Tips

Zero Down USDA Home Loan

For home buyers today, there are two mortgage programs that offer 100% financing.

The first is the VA loan from the Department of Veterans Affairs. It's available mostly to active duty military personnel and veterans nationwide.

The other is the U.S. Department of Agriculture's Rural Development Single Family Housing Loan Guarantee Program. The USDA home loan is sometimes called a "Rural Housing Loan" or a "Section 502" loan.

Similar to FHA loan, USDA does not generate the loan. It insures mortgage lenders against loss 100%. The program is meant to drive homeownership in rural and underdeveloped areas.