How to Boost Your Savings For a Down Payment

President Donald Trump has floated that his administration can help ease the housing affordability crisis by creating portable mortgages, 50-year terms — and now funding down payments using your 401(k).

On Friday, National Economic Council Director Kevin Hassett told Fox Business that the administration is “going to allow people to take money out of their 401(k)s and use that for down payment,” adding that Trump would reveal clearer plans at the Davos World Economic Forum in Switzerland, which runs from Jan. 19 to 23. 

“The Administration is committed to exploring every tool possible to deliver for the American people,” White House Spokesperson Davis Ingle told CNBC Select via email. “President Trump will soon unveil new policy initiatives that will restore the American dream of home ownership.”

Right now, 401(k)s — or employer-backed retirement investment accounts — are structured so that people who tap their funds before retirement for reasons like funding a home purchase will incur a 10% penalty fee on whatever they take out — meaning account owners will lose 10% of their withdrawal. Account holders won’t incur a fee in certain situations, like a qualifying financial or medical hardship, disaster relief, and birth or adoption expenses.

However, first-time homebuyers who hold Individual Retirement Accounts (IRAs) — retirement accounts that are not sponsored by an employer — can tap these funds up to $10,000 without penalty to buy, build or rebuild their first home, according to the Internal Revenue Service. Hassett offered few details on the plan and the White House didn’t immediately respond to a request for comment.

To be sure, just because you can withdraw from your 401(k) for a down payment doesn’t mean you should. Most personal finance experts say it’s usually a bad idea to tap your retirement funds before you reach your golden years: You risk missing out on interest the account is designed to accrue and running out of funds to support yourself in retirement. 

For now, there are alternative options if you’re trying to save for a down payment — including directing funds you would otherwise put toward retirement into a savings account that earns interest.

“If you know, in a few years, you’re going to want to make a real estate investment, you probably shouldn’t be doing all of your saving into your 401(k),” Chris Kampitsis, a financial planner with the SKG team at Barnum Financial Group, previously told CNBC Select.

Here are other ways to save for a down payment — and some options if you want to buy a home now but don’t have enough for initial costs.

Open a low-risk investment account

Low-risk investment options, like high-yield savings accounts or certificates of deposit, are ways to keep your money safe while earning more interest than you would with a traditional savings account.

If you’re thinking about buying a house in the near-term and can’t (or don’t want to) tap your retirement savings, redirecting savings to this kind of account temporarily can help you save more.

Your money can earn as much as nearly 4% a year with a high-yield savings account. What’s more, you’ll be able to access your funds easily while your money grows. The downside is that the rate fluctuates, so as rates go down, so will the amount you earn on the savings.

Western Alliance Bank High-Yield Savings Account has one of the highest savings rates right now. It requires $1 to open an account and you can withdraw from the account up to six times a month — meaning if you really need your cash, you can get it.

However, unlike some other high-yield savings accounts, it does not offer an ATM card or a checking account.

A certificate of deposit – commonly referred to as a CD — is another safe option for you to grow your savings. Unlike high-yield savings accounts, you can’t access your money or add to the account after you open it. The cash will sit in the account for a term of between six months and five years.

But it offers a big bonus over a high-yield savings account in an environment where rates are going down: you can lock in your rate.

Alliant Credit Union offers a CD with a 4.10% rate. Its terms range from six months to five years.

It does have some drawbacks: a minimum deposit of $1,000 and no physical brand locations.

Consider low down payment options

If you want to buy now and don’t have enough for a down payment, you have options.

While typical conventional loans require a minimum of 5% down — government-backed mortgages like FHA, VA and USDA loans, as well as some proprietary low-down payment mortgages, require less.

Federal Housing Administration-backed loans require 3.5% down for people with credit scores of 580 or higher. Plus, the rate is typically lower on this type of loan compared to a conventional mortgage. Guild Mortgage will help eligible borrowers pay even less, through its Zero Down Loan, which requires 0% down with an FHA loan.

Department of Veterans Affairs-backed loans allow qualifying veterans and active service members to access a mortgage with 0% down. Veterans United is a great option, with strong customer service and a sole focus on veterans.

If you’re looking to buy in a rural area, the U.S. Department of Agriculture offers USDA loans for homebuyers who purchase qualifying properties in certain zip codes. Like a VA loan, borrowers can put as little as 0% down. Flagstar is a great, nationally available lender and made our Best USDA loan lender list.

Finally, look at lenders that offer low-down-payment options or grants for first-time homebuyers. ONE+ Loan by Rocket Mortgage is a great option for qualifying borrowers who make 80% or less of the area median income (AMI).

With this product, first-time homebuyers can purchase with 1% to 2.99% down. Rocket will provide an additional 2% of the down payment, which does not have to be repaid.

We want to hear your story. Do you have a financial success, goal or stressor you’re comfortable sharing with a reporter? Please fill out this quick form.

At CNBC Select, our mission is to deliver high-quality service journalism and comprehensive consumer advice to our readers, enabling them to make informed financial decisions. Every mortgage review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties and we pride ourselves on our journalistic standards and ethics.

CNBC Select reviews mortgage products using a variety of criteria, including average rates, terms, availability, fees, types of loans offered, online experience and customer satisfaction. 

Catch up on CNBC Select’s in-depth coverage of credit cards, banking and money and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.