Finding down payment cash is often the biggest challenge to buying a home. Rest assured we have lots of ideas to help you overcome this hurdle.
While PMI or Private Mortgage Insurance has pretty much made the traditional 20% down payment a thing of the past, buyers who are able to put more money down benefit in the form of better terms and lower rates. First an explanation on Private Mortgage Insurance, PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home’s value. In other words, buyers with down payments equal to less than a 20 percent are normally required to pay PMI. PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment (and in some cases if your credit is good with no money down). This means that you can buy a home sooner without waiting years to accumulate a large down payment.
Down Payment Sources
While the obvious source of money for your down payment is either your savings, or if you’re an existing homeowner the proceeds from the sale of your current home, there are alternatives. Here’s a look at some not-so-obvious sources for funding your new home:
If you’ve built up a cash value on your life insurance policy over the years, you may be able to borrow money from the policy, up to the amount of the accumulated cash value. As an added bonus, your policy loan may offer a more favorable interest rate than other types of loans.
Stocks and Bonds
Cashing in your stocks and bonds is another option to consider. But even if you feel the market doesn’t favor selling right now, you may still be able to secure a bank loan using your portfolio as security.
Company Profit-Sharing or Savings Plan
If you participate in a profit-sharing or employer-sponsored savings plan, consider withdrawing from your account or borrowing against if you can.
Your parents may have a considerable amount of equity built up in their home; and, if they’re willing and able, they could perhaps give you the money by taking out a home equity loan. A 1981 federal tax law permits tax-free gifts from parents, so be sure to talk with your tax adviser first. Also, be aware that your lender may require a “gift letter” verifying that your parents don’t expect repayment.
Change the withholding taxes, if permitted, on your salary in anticipation of higher deductions when you get a mortgage. Your take-home pay will increase, giving you more funds to put toward a down payment.
Borrow against your retirement funds. In some cases, the rate on the loan may be as small as 2 percent. If you add too much to your debt burden, however, you may not be approved for a loan.
Withdraw money from your IRA. If you’re a first-time buyer (for these purposes your are considered a first-time homebuyer if you haven’t owned a home over the prior 2 year period) you can pull out $10,000 penalty-free (though you must pay state and federal income tax on it) to put toward your home purchase ($20,000 if you and your spouse both meet the first-time homebuyer requirements). If you’re not a first-time buyer, pull out the very least amount you must. Otherwise, you will have to pay both the 10 percent penalty and income tax on an early withdrawal. Realize that this $10,000 would grow to approximately $300,000 over 30 years though and thus should be consider more as a last resort.
Ask For Help
Ask for help from your church, synagogue or other nonprofit organization. Fannie Mae has a “3/2” loan program that allows you to make a 3 percent down payment if a bona fide nonprofit puts down the other 2 percent.
Bridal Registry (for FHA Buyers only)
FHA buyers who are planning a wedding and plan on getting married before purchasing their new home will be happy to know FHA has a Bridal Registry program that allows the money you receive as a wedding gift to be used towards your down payment. Just like registering at a specialty or department store, the FHA Bridal Registry program allows you to register with a lender by setting up an account, your friends and family are then able to make gift payments into an interest bearing account on your behalf! It’s a great program! Not only can your gifts earn interest, but they can be used as a down payment towards an FHA Loan and a new home!
Plus, you won’t want to forget to plan for these other out-of-pocket expenses:
Closing costs (can be factored into your loan and average 2-4% of the purchase price of the home)
Appliances and household setup,
Reserve for emergencies and miscellaneous items.
In other words, don’t put your last penny down at the closing table. Talk to your home mortgage consultant for more information or for help in planning the financing for your new home.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please give us a call and we’d be happy to assist you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickeringto, 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235