The common thread in nearly every real estate transaction is that the buyer must have a down payment to qualify for a mortgage – with very few exceptions. While this article is intended to stimulate the thought process on figuring out how you can find the money for a down payment, not every solution offered will work for every loan. Nearly every loan program offered today, has some sort of caveat on where the down payment money comes from so make certain you speak with a reputable loan officer early in the process – well before you even start seriously looking at homes on REALTOR.com and other web portals.
Perhaps the most popular loan that does not require a down payment is sponsored by the Veterans Administration, commonly known as a VA Loan. The biggest requirement is that the borrower must have honorably served in any of the armed forces. It’s a bit more complicated than this, so again make certain to speak with a reputable loan officer who specializes in VA loans if you want to pursue this course.
Other 100 percent loans are starting to appear with some lenders. Make certain you understand all of the nuances of these programs before you wander too far down that path. What credit FICO score do you need? What is the Debt-to-Income cap? Is the rate going to be fixed for the life of the loan? How much can it adjust up to – each year and the life of the loan? How much are the origination fees? Can they be financed with the purchase money? What about the closing costs, can they also be financed? Don’t forget to find out how past negative credit actions will affect your ability to borrow – you know what I mean…the bankruptcy, short sale or foreclosure from a few years ago. How do these affect you today?
You can see, there is a lot to know about any loan program. For now, let’s focus on loans that require a down payment – typically these will be referred to as either FHA or Conventional.
How much down do you need?
The answer to this question will vary, again, depending on the loan program. A Traditional Conventional loan has always been typically been 20 percent down. Today there are conventional loans that only require 5 percent down and the FHA Loans will only require 3.5 percnet of your money for the down payment.
That’s what this article is about – finding the money, whether its 20 or 3.5 percent…just remember every loan program has its own restrictions on where that money comes from.
Money from parents
It is very common for parents to want to help their children purchase a new home. With today’s tax laws, they might “gift” it to you without any tax consequences. If they can’t afford to just give you the money, they might be able to loan it to you. Make certain you check with your lender if this is allowed or how long you must ‘season’ the funds before it is allowed.
Pay yourself first
Create a house fund to save your money. Pay yourself first – the same amount at the same time every month and watch your money grow. Don’t be tempted to use it for anything else or put in less – you are doing this for your future so treat it like it’s important to you and worth the sacrifice.
Save your tax refund
When you get your tax refund, put it in your savings account – sure the new plasma TV would be great, but owning the wall to mount it to will be even greater.
We all have stuff in our homes and garages that we thought was “cool” at one point…it’s why we got it in the first place. OK, so there is a lot of cool stuff that you just don’t need or use any more, right? Well, someone else will enjoy it to – so sell it on eBay or have a garage sale and make some money and gain back some space (making it easier to move when you’re ready).
Different loans have different rules, again. With that in mind, ask your seller to contribute to your down payment or closing costs. If you are making a healthy offer near full price, the seller just may be willing to contribute some cash to get the deal done and close escrow. I can promise you won’t get any help here if you don’t ask for it!
Collect any outstanding receivable
Who owes you money? Collect it…with interest. Are you the plaintiff in a lawsuit – settle it and use your proceeds for the down payment.
Down payment assistance programs
There are a number of down payment assistance programs that will range from an outright grant to a very low interest loan. There are some that will share future equity with you, when it comes time to sell the home and others that will gift it after you’ve lived in the home for a number of years. Every program is unique. Some are administered by the government – Federal, State and/or local and others are charitable organizations. Ask both your realtor and your loan officer what they know – but do your own research online – these programs can run out of money quickly and change a lot. One common denominator of every one is an income cap…so do your research.
Borrow from your retirement account
Not every retirement account will allow you to borrow against it, but many will. Check with your tax advisor and financial planner to know what the tax implications may be and any restrictions on what you can do with the proceeds.
Have you asked for a raise lately? Now is a good time. Perhaps now might be a good time to get a better job. So long as you remain in the same field of employment it should not affect your loan application but don’t go switching industries completely – that is never good.
A second job
How bad do you want to get out of that apartment? There is nothing wrong with taking a second job, even if it is substantially below your day job – in other words that fast food restaurant may not be a career move, but if it can put a couple of hundred a week into your bank account it might be a good move. Seasonal work is something to consider…or how about building a web based business that generates income…it’s easier than you think.
Buying a home is always a challenge and it starts with raising the money for the down payment. If you don’t start now, then ask yourself when?
Call us today and get the information you need to make the right decision. The info is free, call now! (951) 296-8887. For questions regarding available inventory and/or other real estate matters, please contact me, Mike@GoTakeAction.com. Mike Mason, Broker/Owner of Mason Real Estate Cal. BRE: 01483044, Board of Director of your Southwest Riverside County Association of Realtors, Traveling State Director, California Association of Realtors.