Putting Together a Down Payment
The amount you have available for a down payment will affect what types of loans for which you can qualify. Down payments typically range from 3 to 20 percent of the sales price for the property.
Tips for Accumulating 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.
You may be able to save additional funds if you can move into less expensive housing.
- 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.
- Make a deal with the seller
In some circumstances, it is appropriate to ask the seller to carry a second-mortgage to cover your down payment. Typically, you will pay a slightly higher rate for this second mortgage.
- Sell some investments
- Get a second job and save your earnings
- Skip a year’s vacation
- 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.
Gifts as Down Payments
One way to fund a down payment is by using a gift. For many loan programs, a gift may be used for a portion or all of the required down payment. Money given as a gift for a down payment can only come from a few acceptable sources. Family members are the usual source and sometimes an employer may also be acceptable. If this is an option open to you, please let me know. I can help you determine which loan programs accept gift funds for down payments and who may give the gift. I’ll also supply the gift letter that the person giving the gift is required to sign. The gift letter states that the funds are a gift and will not be paid back.
Alternative Sources for Down Payment
No-down and low-down Mortgages
- FHA Loans
The Federal Housing Authority (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 and the closing costs can be included in the mortgage amount.
- VA 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.
- Piggy-back 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.
Housing Finance Agencies
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 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.Click here for a list of Housing Finance Agencies.
Documenting Your Assets
Use my Application Checklist to gather the documentation requested by most lenders.
Verifying Your Down Payment, Closing Costs, Assets, Income and Debts
A critical step in the mortgage loan application process is to verify the sources for your down payment, closing costs and assets, as well as documenting income and debts. The lender uses this step to determine your qualifications as a borrower.
Down Payment & Closing Costs
Documenting that the down payment comes from your savings and that you will have savings and/or assets over and above the down payment gives the lender confidence in your strength as a borrower and your ability to repay the loan.
Take extra care to document the sources for any funds to be used for the down payment or closing costs.
Acceptable Down Payment & Closing Costs Sources
- Cash in a bank account
- Mutual funds / stocks / IRA / 401(K)
- Proceeds from the sale of another property
- Gift funds from an immediate relative
Collect information about your personal assets that add to your net worth and help to prove your credit worthiness.
Common Assets Considered in a Mortgage Loan Application
- Stocks, bonds, mutual funds, 401(K) and retirement accounts
- Other real estate or property
Income and Employment
The lender will want to confirm your current gross income and have evidence of stable employment. Documentation requirements vary depending upon a number of factors – including the source of income (hourly, salary, salary + bonuses, salary + commission, commission, self-employed, etc.).
Your lender will want to review a list of all your current debts. This along with your credit report will provide the lender with a snapshot of your obligations. The lender will want to confirm that you will not be overextended when the mortgage payment is added to your current debt load.