Sources of Down Payments - Important Factors to Consider When Purchasing a Home!
By: Chris Reh
When purchasing a home, there are many important factors to consider. One big challenge facing today’s homebuyers is the down payment. It is not just what amount makes sense, or required per whichever loan program you choose, but it is also understanding the acceptable sources you are allowed to use towards your down payment. WHAT IS A DOWN PAYMENT? A down payment is a cash payment required at closing. In addition to the amount you borrow, this will be used towards the total purchase price of your new home. Many states and counties offer additional down payment assistance programs to home buyers as well; contact me if your lender hasn’t explained this. I am going to show you some creative ways you can source the funds needed for your down payment.
1. GIFT FUNDS
Maybe you have some generous family members that are willing to gift you cash to use towards your down payment. This is great and completely acceptable under most loan programs out there. However, who qualifies as an acceptable donor and the amount allowed to give varies. The donor must complete a gift letter stating that the money is indeed a “gift” and does not need to be repaid. The donor’s bank statement is required to verify.
2. TAX REFUND
Using your tax refund can add a sizeable contribution towards your down payment. The estimated average tax refund is expected to be $2,200 for most Americans this year. Some tax pros might recommend to pay debts, invest, donate, and or save. But with the younger generation working hard to overcome debt, a lack of savings and rising home prices; I think this is an effective, easy, and painless way to increase your down payment.
3. PROCEEDS FROM HOME SALE
Homeowners who choose to sell their home may simply use the existing equity proceeds towards their down payment on their new/next home. Something important to consider is that one of the difficulties of selling your existing home while simultaneous buying a new home, is to get both the sale and purchase contracts to close in coordination. Another great option is if you are buying a parent’s home, the equity in that home can be ‘gifted’ to the buyer as part of or the full down payment requirement.
4. YOUR BUDGET
Maybe a source one might easily overlook, however, by simply taking a fine tooth comb through your current budget, you can make some simple cuts to your monthly expenses and free up some additional cash to save for your down payment. For example – cut costly cable services and start streaming what you watch on TV, or prep meals at home instead of eating out every day for lunch. This may be easier than you think; definitely worth the try. TIP: If able, refinance your auto loan at no cost. In many cases, the result reduces your monthly car payment by a third or more; freeing up some nice cash while also lowering your Debt To Income Ratio.
5. RETIREMENT ASSETS
Your financial advisor may not be too excited about this option, but in some instances, borrowing from your retirement assets can have tremendous value to your down payment. Retirement plans sometimes allow employees to borrower up to 50% of the vested balance to be applied towards a down payment when buying a home. Using this approach, you may be able to reach 20% down payment on a conventional loan thus avoiding private mortgage insurance AND lowering monthly payment. Use those savings to simply repay your retirement account through monthly payroll deductions. If you go this route, please consult your financial advisor due to the potential tax implications involved.
6. ASSISTANCE PROGRAMS
You might not find an abundance of federal programs that help you, but many city, county, and state governments offer excellent programs to help homebuyers realize their dream of homeownership. Most are positioned for first time home buyers, have income limitations, and will have specific requirements to qualify for, including but not limited to, purchasing homes that meet certain criteria and homeowner education courses. It’s key to remember that these programs usually come with other stipulations, such as length of time you must occupy the home as your primary residence, that when broken, levy potential recapture fees. TIP: Tap into these programs as soon as possible, because the annual funding diminishes as the year goes on. If you don’t need the assistance for your down payment, then you can actually use those funds to pay your closing costs.
7. POWER PLUS
Only available from your friendly mortgage banker at First Integrity Mortgage Services. Ask your mortgage banker today how you can take advantage of the enormous benefits of our Power Plus options. These also offer an amazing way to avoid private mortgage insurance with less than 20% down.
As one of the largest cash purchases you’ll likely make, I believe it to be most crucial to work with an experienced lender you can trust, so you can begin planning and documenting the source of your down payment early. At First Integrity Mortgage Services, we focus on educating and informing, walking you through different custom scenarios that match your needs, for all of the different loan programs that you qualify for. Stop thinking you need a 20% down payment to buy a house. You DON’T. If you are a current homeowner or thinking of buying a home and have any questions about how much you will qualify for, interest rates, fees, credit repair plans, program guidelines, or have been told you currently don’t qualify by another lender, call me. Chris Reh. 314-420-3122. creh@firstintegrity.com NMLS# 1773185.