Q. What are my options for Down Payment?
Many buyers look at their cash on hand as their only source for their down payment. This simply is not the case. One way to fund or partially fund a down payment is by using a gift. Parents, grandparents and other family members are often eager to help by making a cash gift toward the purchase of your home.
There are also down payment assistance charities that can help you. And, of course, if you are selling a home, the equity you've built up can be applied to your down payment.
But these are not your only options. We can help you explore all your down payment options, including low down payment programs such as
(Virginia Housing Development Authority).
Q. What are some ways to Accumulate a Down Payment?
Look for ways to reduce your monthly expenditures to save toward a down-payment. You could enroll for an automatic savings plan at your bank to have a portion of your payroll automatically transferred into savings. Most people save a couple of years for their down payment.
Borrow the down payment from your retirement plan
Check the provisions of your retirement plan. You can borrow funds from a 401(k) plan for a down payment or make a withdrawal from an Individual Retirement Account. Be sure you understand the tax consequences, repayment terms and/or possible early withdrawal penalties.
Reduce other higher interest rate debt
Paying off credit cards will initially reduce your savings, but the money you will save from higher interest rates will pay-off in the long run.
Sell some investments
Selling some of your investments may be a good option to consider to make your down payment.
Gift from Family
Parents and other family members are often anxious to help children buy their first home and may have the means to give you a gift of money for a portion or all of your down payment.
Learn more on how to provide gift funds for a mortgage through a Gift Letter.
Q. What are some alternative source for a Down Payment?
FHA Mortgage Loans
The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), plays a significant role in helping low- to moderate-income families qualify for mortgages. FHA assists first-time buyers and others who would not qualify for a conventional loan, by providing mortgage insurance to private lenders. Interest rates for an FHA loan are usually the going market rate, while the down payment requirements for an FHA loan are lower than conventional loans. The required down payment can be as low as 3 percent.
VA Mortgage Loans
VA Loans are guaranteed by the U.S. Department of Veterans Affairs. Service persons and veterans can qualify for a VA Loan, which usually offers a competitive fixed interest rate, no down payment and limited closing costs. While the VA does not issue the loans, it does issue a certificate of eligibility required to apply for a VA loan.
Second Mortgage Loans
A second mortgage that closes with the first. Often the first mortgage is for 80% of the purchase price and the "piggyback" is for 10%. The home buyer covers the remaining 10% with their down payment. (Some lenders will write a second mortgage of 15% or even 20% of the purchase price.)
Housing Finance Agencies (VHDA and CDA)
These agencies offer special loan programs to low- and moderate-income buyers, buyers interested in rehabilitating a home in a targeted area, and other groups as defined by the agency. Working through a housing finance agency, you can receive a below market interest rate, down payment assistance and other incentives.
The primary mission of Housing Finance Agencies is to boost home ownership in targeted areas, among first-time buyers and those with little money for down payments. Most of these non-profit agencies were funded with state government seed money and now operate independently.
Q. What is the process to verify my Down Payment?
A critical step in the mortgage loan application process is to verify the source of funds for your down payment and closing costs. In addition, we'll verify other assets and also document your income and debts. These are the primary steps used to determine your qualifications as a borrower.
Documenting Your Down Payment
Documenting that the down payment comes from your savings and that you will have some money left over once the loan closes (known as reserves) gives the underwriter confidence in your strength as a borrower and your ability to repay the loan.
Take extra care to document the sources for any monies to be used for the down payment or closing costs. The best way to do this is by keeping a paper trail of all receipts and statements (ALL PAGES) generated while you're accumulating your funds for closing.
Acceptable Down Payment & Closing Costs Sources
- Cash in a bank account
- Mutual funds / stocks / IRA / 401(K) (70% of the vested balance)
- Proceeds from the sale of another property
- Gift from an immediate relative (Requires a gift letter for documentation purposes)
Q. 401K for Down Payment?
You've finally found the home of your dreams. There's just one thing standing between you and your new house: The down payment.
Many home buyers today opt to use funds from their employer's 401(K) program to come up with the down payment on a house. Ordinarily, you can't take money from your 401(K) plan unless you retire, leave the company or become disabled, but many company plans permit certain "hardship withdrawals" when there is an immediate and heavy financial need, including the purchase of the employee's principal residence.
The drawback to a hardship withdrawal is that you will pay taxes and penalties on the amount withdrawn from your plan, which often must be paid in the year of withdrawal. And while hardship withdrawals are allowed by law, your employer is not required to provide them in your plan. Check with your employer's human resources department if you're not sure if your 401(K) plan allows hardship withdrawal.
Another approach may be to borrow against your 401(K) - often as much as 50 percent of your account balance. You pay interest on the loan, but the interest goes back into your account. The money you receive is not taxable as long it is paid back and plans can give you anywhere from five to 30 years to pay back your loan.
There are risks involved in borrowing from your 401(K). If you lose your job or leave your employer, you must pay back the loan in full within a short period, sometimes as little as 60 days. If the money is not paid back in that time, it is considered a withdrawal from your plan and subjected to the same taxes and penalties. And while 401(K) accounts can usually be rolled over into a new employer's 401(K) without penalties, loans from a 401(K) cannot be rolled over.
In addition, because the funds withdrawn from your account are no longer earning compound interest, your account will be smaller when you retire. And you'll be replacing pretax money with after-tax money.
Some lenders will count the money you borrowed from your 401(K) as an additional debt that will go along with your car payments, student loans and credit cards. While it may seem unfair since you are borrowing your own money, most lenders view it as a payment obligation that affects your debt-to-income ratio in qualifying for a home loan. It may be a factor in whether you decide to make a hardship withdrawal from your 401(K) and pay tax penalties or borrow against it.