The thought of purchasing a home may often seem out of reach. With student loans to pay back and credit card debts to settle up, many buyers wonder if they'll ever accumulate enough money to meet that 20% down payment. Fortunately, there are alternative fund sources available for cash-strapped borrowers.
Here are the three of the most common ways homebuyers obtain money to satisfy their down payments:
1) Gift of Funds
A gift of funds from a friend or family member can be a great option for those struggling to make their down payments. In fact, gifts of $13,000 or less need not even be reported to the Internal Revenue Service – hooray!
Just keep in mind, lenders typically require benefactors to sign a “gift letter.” This document will detail the gift amount, the relationship between the donor and the buyer, and the address of the home 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). In addition, your lender may also request proof of funds from the donor, such as a bank or stock statement.
Most important, be certain to consult with your lender regarding allowable down payment sources, as guidelines vary based on loan program. 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.
2) 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.
To see if your employer offers similar down payment assistance plans, we suggest speaking with your Human Resources representative.
3) Borrowing Against or Cashing Out of Your 401k
Do you have retirement money in a 401k account? If you answered yes, you may want to consider borrowing against or cashing out of your 401k to help satisfy your down payment requirement.
Typically, most lenders suggest homeowners consider borrowing against, rather than cashing out of a 401k. Why is this? Well, when a buyer borrows against his 401k, he will not be subject to any taxes or penalties (unlike the cashing out method). Additionally, a borrower can take out as much as a $50,000 loan from his 401k – now that's a lot of dough! Just keep in mind, however, that a borrower will have to pay some interest on this loan type.
But if you're still leaning towards cashing out of your 401k, make sure to read all of the fine print before signing on the dotted line. For example, most regulations state that when a long-time homeowner cashes out of his 401k, he will incur a 10% penalty fee for early withdrawal – yikes! However, if a first-time homeowner cashes out of his 401k, he will not incur a 10% penalty fee for early withdrawal. Therefore, make sure to review all documentation for withdrawal stipulations before committing to this cash-out alternative. This will only help you better determine if this fund source option is right for you.
Words of Wisdom
To make sure you choose the best down payment option, be sure to speak with your mortgage professional regarding allowable fund sources. In addition, carefully study all options and review your decision with a certified public accountant, poker, or U.S. Department of Housing and Urban Development (HUD) counselor.