Coming up with a down payment for a home purchase can be a challenge for many Americans. The down payment on a $200,000 house, for example, will run a buyer anywhere from $7,000 (for a FHA loan) to $40,000! Many people simply do not have this kind of money and it seems like an insurmountable amount of money to come up with.
There are some other strategies that may help buyers and they are not for everyone – but here is a few to review.
Most lenders will allow home buyers to apply gift money from family members toward their down payment. There are guidelines for doing this, but if you have a family member who has money and is willing to do this for you, then this might be an answer. To get details you will need to check specifics of the program with your lender, but generally speaking, the lender will require a letter from the giver verifying that it in fact is a gift and not a loan. Lenders frown upon it being a loan because the loan amount would add to the buyer’s debt and change their debt-to-income ratio. Also the person giving you the money must be a relative. The lender’s reasoning is that a friend will most likely expect you to repay the money, whereas a relative won’t. FHA loans will allow the gift to make up any portion or all of the buyer’s down payment, many conventional (non-FHA) loan programs will restrict the proportion of a buyer’s down payment that can come from gift money.
The lender may also have specific ways they want to see the money go into and out of your accounts. Before you accept a gift toward your down payment, be sure to check with your lender to be sure that you are doing everything right and the gift will be able to qualify.
FHA Bridal Registry
What you say? Bridal Registry?? The FHA Bridal Registry Program enables home buyers to apply their families’ wedding gifts toward their down payments. You don’t have to be a couple planning to marry to use it, even though it’s named a “bridal registry” program, You could also use this program to collect gifts for graduation, the arrival of a baby or some other major life event in which people want to give you gifts.
The FHA Bridal Registry works like a traditional registry, but is more flexible. The registrants visit their choice of FHA mortgage lenders and set up what essentially is a custodial savings account for the sole purpose of funding their down payment. Then their family and friends can either deposit funds directly into the account or give the cash or check to the couple or individual, who then deposits it into the account. The account’s flexibility also goes beyond that of traditional down payment gift rules that are applicable to FHA loans. With the FHA Bridal Registry Program, the only gift documentation required is “lender and borrower certification of the funds.” Before you decide to get involved and try this, it is critical that you have a lender who is familiar with this program and who is directing you on exactly the procedures so everything is done correctly.
No don’t laugh. Seriously there seems to be some companies that do offer assistance programs to employees. Most such employers are government, university, large company and financial industry employers. As an example, in some circumstances safety workers such as firefighters and police can gain access to down payment grants from their employers if they buy properties in the city where they are on-call as first responders. Also, many large colleges and universities, very large companies and banks and lending institutions offer down payment help and have below-market-rate mortgages set up for faculty members and staffers. Check with your Human Resources personnel to see if any such program is available to you.
Some states, counties and cities still offer programs that lend or give home buyers some assistance for down payments. These programs vary widely in scope. Many of these will only work for buyers with low and moderate incomes. Others are set up to help buyers of foreclosed or fixer-upper type homes. Some programs don’t have to repaid. These programs are given as grants and are forgiven entirely if the buyer lives in the property for 30 years. However they must be repaid if the buyer sells or rents the home before the 30 years has gone by. The programs pretty much all have some sort of homeowner education component that requires applicants to take personal finance and home-ownership preparedness classes before they can receive funds. To find out if any such program might be available to help you, visit your city, county and state websites to learn about programs that might be able to help you.
If you have a 401K or Roth IRA account and some years to go before retirement, you might be able to tap into it or even borrow against your own funds for your down payment. Currently, you can take up to $10,000 out of your Traditional IRA with no penalty to put toward the purchase of your first home, but you will be taxed. You can take as much as you want out of your Roth IRA contributions with no penalty or taxes, though, and as much as $10,000 from your earnings penalty-free for your down payment. The rules get a little tricky, here, so definitely check in with your tax and financial advisers. Also note that many financial advisers will advise not to do this. They will encourage you to keep your retirement funds set aside for that.
Although you can’t similarly draw from your 401K, many retirement and pension plans will allow you to borrow the money against your funds, then repay it to yourself – at interest. The choice really comes down to paying your lender back with interest or paying yourself with interest. But before doing anything with your retirement funds, get some advice from your CPA or financial planner. This option might not make financial sense for your particular situation.
So there may be options for a down payment that you have not yet thought about.
If you are thinking of becoming a home buyer and need to explore these and other lending options, we can give you information about some good lender resources who have assisted a number of our clients.