You’ve contemplated 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 are a wide range of down payment choices most lenders will offer, including first-time homebuyer programs and low-down-payment home loans; options range from 5 percent to the standard 20 percent of the purchase price. If you’re a first-time home buyer in Colorado (or anywhere across the nation), there is a first-time home buyer loan backed by the Federal Housing Administration (FHA) loan that can be acquired for 3.5 percent down. There are also Veteran Affairs (VA) loans for eligible individuals.
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 onto your mortgage until you reach 20 percent equity on your home – an additional cost for a smaller down payment.
Not in the “I have the savings set aside” category? Perhaps you have little to no down payment for a home loan? Here are creative ways to secure the down payment for your dream home.
There are types of loans that allow a family member to gift money for your down payment. Grandpa can have no 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 trackable bank account, so he can’t hand you cash that’s been buried in the tomato plants in a coffee can!
State, local governments, and non-profits all 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 percent without the added private mortgage insurance (PMI) cost. Always ask you lender if there are better options. Fannie Mae has two low-down-payment options not backed by the FHA; these are HomeReady and Conventional 97 loan rates. Both allow for three percent 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 the motorcycle gathering dust in storage and use the 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 percent 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 59½ years old you’ll pay the 10 percent 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 looking for a first-time homebuyer program. The 10 percent 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. And when you’re ready to find a real estate agent and Colorado mortgage lender, consider Lending Maven Mortgage; we’ll set you in the right direction.
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