Top Ways Millennials Fund Their Down Payment

Millennials have inherited a cutthroat housing market. As the pandemic sparked a home buying craze, inventory began to shrink, and homebuyers soon found themselves in home searches that often led to bidding wars. 

But that hasn’t slowed the demand for homes, and millennial homebuyers hoping to secure their first primary residence will want to focus on one of the most important parts of purchasing a house: the down payment.

A sizable down payment can determine how much you will be paying monthly for your mortgage. Placing a larger down payment relative to purchase price can also make your offer more attractive to a seller, increasing your chances of closing the deal. 

Below, the team at Prevu Real Estate highlights some of the top ways aspiring millennial homeowners can fund their down payment.

Top down payment sources for millennials

• Savings
• Crypto holdings
• Gifts from family
• Existing home equity
• Borrowing from 401k

Traditional savings is most common

If you are just starting out on your journey to buying a home, there are multiple ways to save for a down payment.

Traditional ways include setting aside money in cash, usually into bank accounts that prospective buyers use for their day-to-day transactions. But if you’re aiming to set up a savings account specifically to save up for a home, you can consider opening a high-yield savings account. 

Though it may not be at the same bank as your checking account, a high-yield savings account provides a much better interest rate and compounds your earnings over time. Other savings options can include investments like stocks and bonds that may appreciate over time and are liquid enough to convert to cash easily when you are ready to buy a house.

If you are saving strictly with cash, prepare yourself for a circumstance in which the asking price of a home will jump significantly because of multiple offers. You might have found the home of your dreams, but the set amount you have for a down payment may not be enough if the seller receives higher offers.

Budget aside an extra amount to pad your offer so that you feel comfortable putting down a sizable down payment. 

Crypto is becoming more mainstream

Millennials who invested in cryptocurrencies such as Bitcoin or Ethereum have some options when funding a down payment.

Although crypto fluctuates wildly, it presents opportunities to raise capital quickly if the market sways in your favor. The risks are equally as great since crypto values can abruptly crash. But for those whose crypto holdings grew considerably, liquidating some of it and securing it in a more stable asset such as real estate is an excellent way to capitalize on your crypto gains. 

Converting your crypto into cash can create a taxable event, so aspiring buyers should always consult with their accountants to see the best strategy available. But cryptocurrency has grown to be an effective way for millennials to help fund their home purchase.

For those wondering if their crypto can also help them secure a loan, it may be harder than you think. Most lenders don’t recognize crypto in underwriting conventional loans. Even if you are able to use crypto as proof of financial reserves, lenders will want to see a clear record of the transaction history. 

Many crypto-trading platforms lack a comprehensive statement system which can lead to lenders simply requesting that the crypto be cashed out. 

Gifts from family members

As demand for housing remains strong, prices for homes continue to rise, creating affordability issues for millennial buyers. This has led this generation of buyers to look to parents that are Baby Boomers for financial help, such as with funding a down payment or paying closing costs.

Gift money is usually transferred to the buyer in one lump sum, and, depending on the amount and number of purchasers receiving the gift, there may be a gift tax. Each situation is unique, and you should contact your accountant to understand your particular situation best. In general, however, gifts from a parent would require the benefactor to declare to the IRS the amount and file the necessary paperwork as needed.

Many lenders will ask for documentation of the funds transfer, as well as a gift letter from the person providing the funds to attest that the money being provided is a bona fide gift. This is to ensure that the funds are not a loan, since that would create risk to the lender of another party that could place a lien on the property if such a loan were not repaid.

Existing home equity

Millennials who are already homeowners, either through a purchase or inheritance, have another helpful tool that can help fund their down payment.

Existing home equity is an effective way of leveraging your current home’s value to create capital that you can put towards a new down payment. 

You can either sell your home to take advantage of the equity value and use that amount to fund a down payment on a new home. Alternatively, if your home has increased significantly in value and you don’t want to sell, you may qualify for a home equity loan or home equity line of credit (HELOC) to tap that value and put toward an investment property or vacation home.

Speak to your mortgage lender to understand how you can use the existing equity in your home to your advantage.

Borrowing from retirement savings

Though it comes with a set of nuances, borrowing from your 401k is another option for coming up with the necessary funds for a down payment. 

Mortgage lenders will generally allow buyers to pull money from retirement plans to help fund a down payment. But homebuyers should be aware that they might face early withdrawal penalties and will have to pay income tax on the amount taken out. 

One way to avoid this is to borrow from your 401k instead. Buyers can take out a loan from their retirement plan under a set reason, such as buying a home, which they will then have to pay back in a certain amount of time.

All buyers should consult with their buyer’s agent and accountant to best evaluate their situation to see if using retirement funds is a viable way to help with the down payment.

Interested in buying a home this year? Browse listings and see how much you can save with Prevu’s Smart Buyer Rebate.