Down Payment Assistance Programs and Other Ways to Make Your Down Payment
03/19/2018 Kristin Demshki
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For many potential homebuyers, purchasing a home seems out of reach. With credit card debt to pay off and student loans to repay, many buyers wonder if they’ll ever save up enough down payment (typically, 3-20% of the purchase price). Fortunately, there are down payment assistance programs and other alternative funding sources for cash-strapped buyers.
Here are some common ways homebuyers get the money they need to make their down payment:
Employer Buyer Assistance Programs
Many organizations, such as universities, municipal agencies and corporations, offer home buying assistance programs to employees. In fact, some companies even offer relocation assistance programs in job packages to help attract top-level recruits.
Speak with your Human Resources representative to see if your employer offers similar down payment assistance plans.
Second Mortgage Loans/Down Payment Assistance Loans
Another option to help you meet your down payment is a “second mortgage loan.” This low-interest or zero-interest loan is often structured as a second, closed-end mortgage and it is used when buyers need to set money aside for a specific purpose, such as a down payment.
Make sure to review the terms and conditions of your second mortgage loan very carefully. The annual percentage rate (APR), closing costs, and prepayment penalties are key to deciding whether or not a down payment assistance loan is the right option for you.
Mortgage Credit Certificate Tax Credit
A Mortgage credit certificate (MCC) is another popular way for first-time homebuyers to raise down payment funds. This federal income tax credit helps buyers offset part of their mortgage interest to help qualify for the loan. The MCC helps reduce the tax burden for homebuyers, freeing up funds for the down payment and other expenses.
The mortgage credit certificate works by offering a tax credit based on the interest paid in the next year. For example, if your new mortgage is set to cost you $10,000 in interest for the first year, an MCC that offers a 25% credit will get you a $2,500 tax credit in the first year.
One significant benefit of the mortgage credit certificate is that you can continue to receive the credit for as long as you keep the original mortgage and live in the home.
Gift of Funds
A gift of funds from a friend or family member can be a great option for those struggling to come up with their down payments. In fact, if the gift is $13,000 or less, it doesn’t even need to be reported to the Internal Revenue Service!
Lenders typically require the benefactor to sign a “gift letter.” This letter should include the donor’s contact information (name, address, and phone number), the donor’s relationship to the buyer, the amount of the gift, the date the funds were transferred to the buyer, and the address of the property being purchased. This form will also certify that all gifted funds will not be subject to repayment (i.e. you do not have to pay your friend or family member back). Your lender may also request proof of funds from the donor, such as a bank or stock statement.
Guidelines vary based on the loan program, so make sure you check with your lender regarding allowable down payment sources. For example, most lenders will not acknowledge a gift as valid if a donor is listed as a seller, real estate agent or home builder.
Borrowing Against Your 401k
Do you have retirement money in a 401k account? If you answered yes, you may have the option of borrowing against your 401k to help satisfy your down payment requirement.
Typically, most lenders suggest homeowners consider borrowing against, rather than cashing out of a 401k, for tax reasons. If a buyer borrows against their 401k, they may not be subject to any taxes or penalties, unlike when you cash out.
Additionally, you can take out as much as a $50,000 loan from his 401k, which goes a long way toward making that down payment! Just keep in mind, however, that you will have to pay some interest on this kind of loan.
If you’re leaning towards cashing out of your 401k, rather than borrowing against it, make sure to read all of the fine print before you sign. For example, most regulations state that when a long-time homeowner cashes out their 401k, they will incur a 10% penalty fee for early withdrawal – yikes! However, if a first-time homeowner cashes out of his 401k, they will not incur a penalty fee for early withdrawal. Therefore, before you decide if this funding source is the right option for you, make sure to review all documentation for withdrawal stipulations before committing to this cash-out alternative.
State and Local Buyer Assistance Programs
The U.S. Department of Housing and Urban Development (HUD) offers grants to state and local organizations through the HOME Investment Partnerships Program and Community Development Block Grant Program. State and local housing finance agencies use this money to fund homebuyer assistance programs, which may vary by state. (Visit the HUD website to find programs available in your state.)
Under most programs, as long as you own and occupy your home for a certain period of time, you do not have to repay grant funds. If you decide to sell the home before the agreed-upon time has elapsed, you will have to pay it back in full.
Many lenders offer specific loans that complement these down payment assistance programs. These programs are typically restricted to owner-occupant buyers, so investment properties will not qualify. Under most down payment assistance programs, you must make a minimum investment, qualify for a first mortgage, complete homebuyer education and meet eligibility requirements for sale price, homebuyer income and homeownership history.
Keep in mind that your situation and/or your job may qualify you for specialized programs. For example, there are benefits (and even entirely separate programs!) for first-time buyers, educators, healthcare workers, veterans and households with disabled members. In the instance of a program like HomeReady®, qualified borrowers can put down as little as 3% of the purchase price. Check with your lender to see what programs you might qualify for and what eligibility criteria you need to meet.
Choosing the Right Down Payment Assistance Program
Down payment assistance programs are offered by state housing finance agencies and local housing authorities around the country but they are often overlooked by homeowners who don’t think they’ll qualify. But the truth is, down payment assistance is available for a wide range of potential homebuyers in many different situations.
If you’re ready to purchase a home, don’t let the down payment scare you away! There are plenty of homebuyer assistance programs waiting to be used by potential homeowners like yourself. For more information about PennyMac loans and down payment options, call a PennyMac Loan Officer today.