Finding the Money for Your Next Home
For many people, the biggest obstacle to home ownership is the down payment. Monthly bills often prevent folks from saving enough cash to buy their first home, so the number one question I get is, "Other than my own savings, where else can I find money for the down payment?" Here are some of the most popular sources of down payment money, along with the dos and don'ts…
1. Your Relatives
You are not permitted to borrow money from a relative to use for a down payment, but a gift is acceptable. The lender may ask that you provide a letter from your relative that the money really is a gift, and that it will not be repaid. The gift also must be from a blood relative, so despite his good intentions, your cousin's wife's uncle will not be able to help.
2. Your Stocks
As a general rule, borrowing money for the down payment is allowed only if you are borrowing against another hard asset. If you have stocks or other investments that you do not wish to sell, you may be able to take a loan secured by those assets and use it for the down payment. Bear in mind that you will have an additional payment to make (to repay that loan), and this may decrease the mortgage amount you can qualify for. Finding the Money for Your Next Home
3. Your Mattress
OK, I guess there are still people who keep cash under their mattress. If you plan to use any previously-unaccounted-for cash toward your down payment, your lender will ask for a written explanation of where the money is coming from, and will ask you to prove it. Lenders want to make sure that the money was not borrowed, and that it did not come from some illegal activity.
4. Your Other House
If you already own a home, and have equity, taking a second mortgage or refinancing could be a solution. While lenders will allow money borrowed against other real estate to be used toward a down payment, please remember that taking on this additional debt may affect your ability to qualify for the mortgage on your new home.
5. Your Retirement Accounts
Tapping into your retirement account to come up with the money for the down payment is an option that some lenders advocate, but I must admit that I am not a big fan of this. You have two options. One is to withdraw the money from the retirement plan early. Every CPA and every financial planner I know will tell you that this is a bad idea. You will not only pay penalties to the IRS for withdrawing early, but you will lose the years of appreciation that you would have realized until your retirement. This is a very expensive proposition, indeed. The second option is to borrow against a 401(k) or a qualified profitsharing plan, if you have one. In this case, (a) you have to make monthly payments and interest on this new loan in addition to your mortgage; (b) the mortgage amount you qualify for will decrease; and (c) if you leave your company you may have to pay back the balance immediately, or it may count as an early withdrawal (triggering the IRS penalties again). Using your retirement money for the down payment should be considered only as the last resort.
6. Your Government
There are several government sponsored down payment assistance programs for those who qualify. Firsttime buyers may be able to get special low down payment loans. There is a no down payment program for qualified veterans. And there are a handful of other lesser-known programs for people in certain income groups. If you are planning to buy a home soon, and the money for the down payment is tight, feel free to call me; I can recommend a good lender that can help you determine if you qualify for any of these special programs.