Financing Your Down Payment
You’ve been contemplating purchasing a home; you’ve even started looking at one in your price range and preferred location.
What about the down payment? Where will it come from?
Pulling such a large amount of cash out of your hat can seem impossible, but there are creative ways to get your hands on it.
There is a wide range of down payment choices that most lenders will offer. They include options ranging from 5% to the standard 20% of the purchase price. If you’re a first time buyer there is a government backed FHA loan that can be acquired for 3.5% down. There are also VA loans for those of you that served in the military.
Most home buyers already have a hefty savings account set aside for this. Lenders like these kinds of borrowers as this shows responsibility: the larger the down payment the less risk to the lender. It may also help you qualify for a lower interest rate.
When making a down payment, bigger is definitely better.
The smaller the down payment, the larger the monthly mortgage payment. Your lender may even require you to get private mortgage insurance. This fee is tacked on to your mortgage until you reach 20% equity on your home, another additional cost for a smaller down payment.
Not in the “I have the savings set aside” category? Here are some creative ways to secure the down payment for your dream home.
There are types of loans that allow a family member to gift you the money for your down payment. Grandpa can’t have any financial interest in the property and he may be required to sign paperwork stating that the funds are indeed a gift and no repayment is necessary. He may also be required to have the funds in a bank account that can be tracked, so gramps can’t hand you cash that’s been buried in the tomato plants in a coffee can!
State, local governments and non-profits have programs that offer down payment assistance for borrowers. They partner with banks who hope to get you in their door and take advantage of additional business you may bring. For example, Wells Fargo partners with NeighborhoodLIFT and offers down payment assistance up to $15,000.
There are some loan options that will allow you to put down less than the standard 20% without the added PMI cost. Always ask you lender if there are better options. Fannie Mae has two low down payment options that are not backed by the FHA, HomeReady and Conventional 97. Both allow for 3% down payments. HomeReady is for buyers with low to moderate incomes; it has expanded to include low income, minority, and disaster impacted communities, though you must still have a decent credit rating to qualify. Conventional 97 is for credit worthy borrowers who could qualify but just don’t have the funds for a larger down payment. There are also VA home loans with zero down if you meet the qualifications.
Sale of a Good
You can sell that motorcycle that has been gathering dust in storage and use that money for your down payment but you must have a paper trail such as a full bill of sale and bank statement showing you deposited the funds that match the bill of sale. If it’s plausible and your lender can track the transaction from start to finish, you’re golden.
Line of Credit
Sometimes the lack of a down payment does not go hand in hand with the amount of income you have. You can take out a line of credit or a personal loan. These can be used for a down payment, but here’s the kicker: that money has to be in your bank account for two months to be considered for a down payment. Not the best option if you’re already into the buying process.
Dip into your 401(k)
Stocking away money in a 401(K)? You can borrow from it for a home loan. You can borrow up to 50% of the vested balance or up to $50,000, and it takes about a week to get your funds. This one comes with strings as well, unless you’re 59 ½ year old you’ll pay the 10% penalty for early withdraw and it’s a loan you’ll have to pay back yourself.
It’s better to use your IRA, if you have one and are a first time home buyer the 10% penalty does not apply. You also don’t have to repay what you take out.
Hit up your boss
Not like it sounds at all. Your company may have a program that offers employee assistance for down payments. These types of loans are often structured with a very low interest rate and offer a longer period of time for repayment. Most hospitals and universities have these programs.
As you can see there are many ways to get the funds for that down payment. Don’t give up.
Good luck and be creative.
Tricia Houston, Owner
Lending Maven Mortgage
Colorado native and Stapleton resident
You have questions about getting a mortgage, and I have the answers