Down Payment Secrets for Homeownership

The down payment to buy a home is typically the biggest obstacle, especially for first time home buyers, when thinking about buying a home. We can talk over the phone about how much you might qualify for and I can quote monthly payments based upon a particular loan amount, but the down payment is the first thing that needs to be considered. Unless you’re eligible for a VA loan or buying a property in a rural area, you’ll need some sort of a down payment. The FHA program has a low down payment requirement and even special first time buyer conventional programs can ask for a down payment of as little as 3.0 percent of the sales price. Still though, that can be a lot. On a typical $400,000 home, the minimum down payment would be at least $12,000. That’s not including closing costs and cash reserves, either. But there are ways to come up with some or all of that money without you having to save up for it or take a chunk of cash from your checking account.

Down Payment Options

Lenders must “source” the funds for your down payment to make sure the funds are qualified to be used. If the funds are coming from a bank account, you’ll need to provide copies of your bank statements showing those funds. “Sourcing” means proving where the funds came from in the first place. Lenders want to make sure the money used to close on a transaction are not borrowed from someone else or a personal loan that would affect your ability to repay the mortgage later on. A pattern of regular deposits into your savings account would show that. But if a $12,000 deposit shows up in your checking account with no approved source, there will be some explaining to do.

Family Gifts and Retirement Accounts

If you need some help with your down payment or funds to close, one of the most common ways, especially for first-time buyers, is to obtain a financial gift from a family member. The financial gift that use for a down payment must be tracked from the donor to your account and accompanied by a gift letter stating who is giving the gift, the relationship and the amount. When it’s time to close, the donor sends the funds electronically to your settlement agent. There’s no need for the donors to hand the funds over to you only to have you transfer the funds once again when it’s time to close.

If you have a 401(k) at work, it’s likely you can borrow against that account to fund your down payment. You’ll need to contact your HR Department for details but most companies that offer such retirement accounts allow employees to borrow from it. Note, this is a loan that needs to be paid back. Rates are typically very, very low and the payments are deducted from each paycheck without the need to write a separate check or transfer by the borrowers. Employers may also have the ability to provide a financial gift or bonus to an employee for the purpose of buying a home, whether it’s for a down payment or closing costs. Again, this is up to the individual employer, but it’s allowed as a legitimate source for down payment money and closing costs.

Takeaway

The secret with any type of fund documentation is making sure the funds are properly documented and coming from an acceptable source. If you’re not sure what type of documentation is needed, all you need to do is call or email me and I’ll forward the details. It’s fairly straightforward and easy to accomplish, but you do have to follow the guidelines properly.