Down Payment Questions

Mortgage Questions and Answers

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 FHA and VHDA (Virginia Housing Development Authority).


Q. What are some ways to Accumulate a Down Payment?


Q. What are some alternative source for a Down Payment?


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.