One of the biggest challenges, if not the biggest challenge, is coming up with the money for a down payment on a home. Even if someone is taking advantage of the new conventional 3.0 percent down program or the FHA mortgage, most every loan requires some sort of a down payment. While 3.0 percent doesn’t sound like a whole lot, if you’re buying your first home it usually is. On a $250,000 home, that comes out to $7,500. That’s not even mentioning closing costs. But there are sources for down payment funds that might sometimes be overlooked.
Okay, this is the obvious source. From a checking or a savings account, accessing readily available cash from a bank account is the most common. Consumers can save up a little each month until the minimum amount of funds needed have accrued. The lender will ask for copies of the most recent bank statements showing available funds as well as documenting the source of those funds. Most often the deposits are from an employer via direct deposit. Self-employed borrowers who do not receive a regular paycheck on the 1st and 15th will be asked to provide business bank statements as well.
There are those fortunate few who do receive a financial gift from a family member. Gift funds must also be tracked to make sure the funds are coming from an acceptable source. Gift funds can come from a family member, relative, or someone in a committed relationship. Lenders want to make sure the gift funds aren’t a loan that must be paid back at some point in the future. There needs to be a signed “gift letter” included with the loan file stating the amount of the gift, the donor’s name and where the funds are coming from. Lenders won’t ask for bank statements from the donor, but do want to know the funds came from an account in the donor’s name.
A Retirement Account.
If someone has a retirement account with an employer such as a 401(k), that person can take out a loan against the fund. This is allowable per lending guidelines but is also subject to the employer’s approval. Most retirement funds allow for someone to borrow up to one-half of the employee’s vested balance in the account. With an IRA, first time buyers can withdraw up to $10,000 without penalty. The withdrawal will still be subject to any income tax due.
An Appraisable Asset.
If someone owns something that can be appraised by an independent third party, the proceeds when selling that asset are an acceptable source. Selling an automobile is acceptable, for instance because it has an appraised value. Even a highly prized baseball card is an appraisable asset. It’s important to document the transaction from the initial sale to the deposit in the account.
A Down Payment Assistance Program.
Down payment assistance programs are typically overseen and/or issued by a county or state agency. Such programs typically require the borrowers’ gross monthly income to not exceed certain limits and are often available to first time buyers. These programs can also be geographically targeted to help low to moderate income communities flourish. Down payment assistance can come in the form of a grant, which means there is no repayment required, or a loan which can be forgiven after living in the property for a certain period of time, typically three years or more.