First of all, check with your Loan Officer to insure that the funds you presently have for your down payment are acceptable based on the loan program you intend to use.
Hopefully you have committed to a specific real-estate agent and they can be a good source to learn about any State or local housing incentives, grants and special loans that local agencies may offer.
Some down-payment ideas are safer than others; a few have toxic consequences to your taxes or retirement savings. Study your options carefully and review your plan with a tax specialist or nonprofit housing counselor approved by the Department of Housing and Urban Development (find one here call 1-800-569-4287).
Here they are! A Dozen Down-Payment Ideas!
1. Pull from savings: The time-honored way to save for a home purchase is to commit to a budget and set aside money each month for this specific purpose. Use an automatic electronic transfer through your bank or credit union. Choose an account that that earns the most interest possible while letting you access the money. Most importantly, commit to this financial plan for a specific extended period of time and do your very best not to deviate!!
2. Liquidate miscellaneous assets: Sell your nice car, buy a beater and apply the difference to your down payment. Sell your boat, motorcycle, collectibles time-share or other assets. Deposit your tax refund. Call in money that people owe you. Do you own any precious metals, gold and silver have never been higher!
3. Liquidate taxable investments: Sell stocks, mutual funds, bonds and other taxable investments before touching money held in tax-deferred retirement accounts, such as 401(k)s and IRAs, which require you to pay significant penalties when you sell. Again check with your tax advisor before making this type of financial move!
4. Cash in a life-insurance policy: So-called permanent life insurance policies (not “term” policies but “universal” or “variable universal life” or “whole life” policies) grow in value as you pay into them. When enough value has accumulated, you can take cash out or borrow against them. Talk with your insurance agent to learn your options and implications in the loss of benefits in cashing out such a policy.
Family and Friends:
5. Use a gift: Some mortgages – loans insured by the Federal Housing Administration, for example – let you apply gifts from immediate family members toward your down payment. You’ll need a “gift letter” from the person who gave you the money, verifying that it doesn’t have to be repaid. Be prepared for the lender to ask for copies of checks or wire transfers to ‘verify the paper-trail.’
6. Try your employer: Some corporations, universities and local and state governments have programs to provide employees with down-payment assistance. Check with your human-resources department. For example, in South Dakota, 19 employers participate in a state-sponsored Employer Mortgage Assistance Program that lets employees take out a 2% interest rate second mortgage for $600 to $6,000 to cover closing costs and down payment. Each year, the city of Baltimore and state of Maryland contribute as much as $6,000 to 100 city employees (PDF) to help them buy homes within the city. These programs are meant to help keep valued employees in their jobs and closer to work.
7. Establish a Financial Partnership: A co-owner can help by sharing costs, including the down payment, and by signing on to be responsible for repaying the loan if you can’t quite qualify for a mortgage. Your loan Officer can explain these details. Only go into a partnership such if all other options are off the table.
8. Negotiate — with everybody. If you can save or even eliminate closing costs — which run roughly 1 – 2.5% of the cost of the home. Although a seller in most cases can’t fund your down payment, the law lets buyers accept help with closing costs. Using an FHA loan, you can accept up to 6% of your home’s purchase price toward your closing costs, although the FHA has explored dropping that to 3%. Conventional loans limit the help you can accept to 3% of the price if your down payment is 10% or less; it’s 6% with a down payment of more than 10%. Your seller, lender or real-estate agent can help with closing costs. These parties occasionally will kick in to help a cash-poor buyer get a deal done.
9. Your seller (including builders): Buyers have a lot of leverage with sellers today!!
- Ask your real-estate agent to help you search for sellers who are offering to cover closing costs.
- Propose that the seller help with closing costs when you’re negotiating price and terms, they can be your best source of capital assistance!
- Sellers sometimes will sweeten the deal by purchasing discount “points” that lower your interest rate, letting you use more of your cash for the down payment. Each point costs 1% of the loan amount and can be used to reduce your rate by 0.125 to 0.25 percentage points. (If your mortgage was for $150,000, the seller might buy one point, for $1,500, potentially lowering your interest rate from 5.25% to 5%.) This would lower your monthly payment from $828 to $805.
Caution: Pushing a seller too hard to lower the price and make other concessions could ruin the deal. Be prepared for the seller to ask for a higher purchase price in exchange. Then the question is: Will the appraiser find the home worth the higher price?
10. Seller financing: Infrequently, a seller may be willing to act as your banker. It might be possible to strike a no- or low-down-payment deal with a seller who owns the home free and clear. But if the seller has a mortgage, you’ll need to qualify for a loan just as you would with a bank, including a down payment.
11. Your new employer: Your leverage with an employer is never better than when you are first signing on. Depending on the company and how badly your skills are needed, you might be able to negotiate a contribution toward your down payment as part of your benefits package, as a signing bonus or in place of a relocation allowance.
12. Borrow from your 401(k) or IRA: Most companies let employees borrow from the balance of their 401(k) accounts. Rules vary but, generally, you can extract as much as half of the vested amount in the account, up to $50,000. As you repay it, the money, including the interest, goes back into your 401(k). The plan administrator at your workplace can outline the specifics, including how long you’re given to repay the loan. There’s an exception to penalties on withdrawals from retirement accounts that lets first-time homebuyers withdraw up to $10,000 from an IRA to use as a down payment on a home purchase
Caution, Be Careful Here:
- As long as you repay the loan, you won’t be taxed on the money until you withdraw it in retirement; unlike a mortgage loan, the interest you pay on this loan is not tax-deductible.
- As with the IRA withdrawal, this is considered a bad idea because it sets back your retirement progress.
- If you leave the employer for any reason before repaying the loan, you’ll have to repay the entire thing at once. Don’t say we didn’t warn you.
In Conclusion: While creativity can offer unique ideas or possibilities, there can be offsetting risks that may not be worth any possible reward. For this age old classic challenge, “where will we get the down payment money for our first home”, nothing beats the 2 most well established standards for this capital predicament: Committing to a budget, saving your money over time … and/or… getting a well established, well wishing relative to help you out.
Kevin Brown Loan Officer Pacific Funding Group, NMLS # 282200