Home Loan Down Payment Assistance (Know Your Options)
By James Young on May 26, 2014
Pulling together a sizable stash of cash can sometimes stop a prospective homebuyer in his or her tracks. Unless you qualify for certain loan programs that require little money down, you’ve probably found coming up with your down payment to be the biggest challenge standing between you and home ownership. But there are several avenues to consider for home loan down payment assistance.
First things first
Before you settle on one or more pathways for coming up with sufficient cash for your down payment, be ready to put each potential source to the test by asking the following questions:
- Are you able to verify beyond any doubt that the source of your down payment is legal and not a scam?
- Has your bank lender or mortgage broker confirmed that your potential source is an approved one, according to the rules of your particular loan program?
- Have you reviewed your plan with a certified public accountant to determine impacts on your taxes and/or retirement account, as applicable?
- Are you prepared to keep a detailed paper trail of any transactions for both your lender and for tax purposes?
Once you’re ready to keep these four questions in mind, you can move forward by carefully considering your options for securing enough to cover the down payment on your new home.
- Investigate state and local housing incentives. Depending on your location and situation, there may be state and local housing incentives, grants or special loan programs available to you. These change frequently, but your real estate agent is an excellent source for this type of information.
- Ask friends and family. Depending on the loan program you will be using, you may be able to make use of cash provided by friends or relatives as a “gift.” Certain rules and documentation apply.
- Maximize your savings. The traditional route for coming up with a down payment is to save a specific amount each month until you’ve got enough to get financing. Automatic deposits into your savings account out of each paycheck is a convenient way to grow your savings.
- Liquidate unnecessary assets. Do you have a boat, jet ski, cycle or other toys? Now is the time to consider sacrificing a few of these goodies in the short-term to make your longer-term dream of home ownership come true.
- Sell any stock options. Are stock options a part of your compensation? If so, contact your human resources department to determine if you are able to sell them.
- Sell off other investments. If you have stocks, mutual funds, bonds and other taxable investments, sell these before you consider sources that carry tax penalties, like dipping into your 401(k).
- Cash in a life insurance policy. Ask your insurance agent about cashing in policies that have accumulated cash value. Not all policies qualify, but if you have a “universal” or “whole life” (or similarly labeled) policy, your agent can tell you if you can cash in or borrow against it. However, if yours is a young family, you could be leaving your loved ones in jeopardy in the event of a tragedy.
- Check with your employer. Some companies and corporations have created programs to help employees raise enough money for to provide home loan down payment assistance. Check with your human resources department.
- Ask your lender. No, don’t ask your lender for a gift. Discuss whether he or she might reduce their origination fee or fold some of your costs into a monthly payment. This may cost you more in interest, so be sure to weigh the pros and cons before exploring this route.
- Negotiate with your seller. Some sellers may be willing to cover a portion of your closing costs, which could free up more cash for your down payment.
- Bank with your seller. While rare, there are instances where a seller may be willing to finance your purchase and accept a lower down payment than conventional financing.
- Tap your IRA. While withdrawing money from your retirement account is never worth it due to the tax implications, there is an exception on withdrawals from retirement accounts that allow first-time homebuyers to take up to $10,000 from an IRA as a down payment. Avoid simply withdrawing money from your tax-deferred retirement account. The IRS will hit you with a huge penalty and you will have difficulty ever making the amount up again.
- Borrow from your 401(k). Ask your plan administrator to discuss the pros and cons of borrowing the down payment from your 401(k), if you have enough vested funds. He or she can also discuss the process in detail.
- Time a job change. You may be able to negotiate a portion of your down payment as a sign-on bonus or other part of your package if you happen to be contemplating a job change.
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