Down Payments and What Kind of Accounts Can You Use

This is going to be a lengthy subject, simply because there are a number of different ways you can go about this and I want you to know ALL your options. (Because I care)

Down payments are in essence your own "earnest money" in the deal. Your down payment tells a lender that you are serious about buying a home and that you're willing to put some skin in the game.

A down payment is one of the risk elements lenders evaluate when making a mortgage loan, and it goes a long way in helping a lender make a loan. The more down payment from the borrower, the more risk a lender might take. The less down payment from the borrower, the less risk a lender might take.

A down payment must be your very own blood, sweat and tears. Lenders want your down payment to come from your own savings or checking accounts. Other people can't make it for you, though they can help by giving a gift. Otherwise, it has to come from you. There are programs that require no down payment whatsoever, the loan programs that let you borrow your down payment, but most every loan available will require a down payment of some type.

The money will primarily be in your checking or savings accounts. Your lender will typically ask for account statements for the preceding two or more months (depending if you're a W2 employee, self employed, or choosing a non-qm mortgage product) to verify your funds to close the deal.

Why two months?

A lender wants to see a pattern or history of an account. If suddenly $20,000 pops into your bank account, the lender will want to know where it came from. Did you borrow it form someone else? Are you obligated to pay it back?

By providing two months bank statements, you can make it clear to the lender that the funds you've saved came from you and you only. Some home buyers are in fact advised by some loan officers to simply "put some money in the bank and call back in two months," assuming that the lender won't care where the fund came from.

Your funds can come from your job, a bonus, your regular savings, selling something, or borrowing against an asset. Your paycheck can certify that you're getting a certain amount each month, and you can verify that it's going into a bank account. Same with any bonus or commissioned income. It's documented as you make it.

Some people have assets they can sell for down payment money. Do you have a car you can sell? Artwork? Stocks? The key to selling an asset is that, first, you need to document the transaction, and second, the object must be an appraisable asset.

An appraisable asset is an item whose value can be determined by a third-party expert. Do you have an expensive watch or heirloom jewelry? If the item can be appraised in this instance by a gemologist or jeweler - and sold, then you can use those funds to buy the house.

Another form of down payment can come from a pledged asset, which is typically a stock or investment account that you can borrow against for a down payment. The stocks aren't cashed in; you simply pledge the asset as collateral for down payment funds. If it can't be appraised, the lender may not be able to use those funds for a down payment.

If you can't document where the down payment is coming form, many loans won't allow for that. Lenders want to be absolutely certain that the money you used to buy the house is not borrowed from another source. Borrowing from another source will affect your debt ratios and your collateral. It also affects your equity in the property and increases the risk in the loan. That's why people can't take out cash from their credit cards for down payments. The moneys borrowed.

Can I Borrow Against My Retirement Account?

Sure you can, if your plan allows you to do so. Lenders have allowances to borrow all or part of a down payment from a retirement account, like a 401(k) plan, as long as they get to see the terms of your repayment and they are acceptable to them. Most plans are acceptable to lenders, but typically a lender wants to verify that the loan repayment won't affect your ability to repay other debts, including your new mortgage.

Personally, I've closed millions in deals where people used their retirement funds to help them buy a home. Another bonus is that even though you now have a 401(k) loan with a new monthly payment, your lender won't count that new payment in with your debt ratios.

Contact your employer or plan administrator and tell them you're getting ready to buy a home and would like to explore borrowing against your 401(k). There is typically a time lag. So if you plan to borrow from it, start this process early.

Can My Family Help Me Out With A Down Payment?

Of course any family member can help you out. If you are one of the chosen few fortunate enough to have relatives who can provide you with money for down payment funds, they are certainly a great source.

Some of my favorite loans to work with, primarily because it's a family getting together for a huge life changing purchase.

These are called, oddly enough,?gift funds. Recent changes to "gift" requirements allow only immediate family members, churches, government agencies, and labor unions to make gifts to help with down payments and closing costs. Gift funds carry their own rules as well (go figure), but knowing in advance what a lender requires for gifts will help make your closing go a lot smoother.

It's important to know that gift funds usually only work for first time home buyers.

Often times lenders will also ask for a gift affidavit, a form signed by the givers swearing that the money they're giving you is indeed a gift, not a loan, and is to be used for the purchase of a home.

Even though you're getting a gift, most loans require that you have additional funds lying around somewhere after the deal is closed. These funds are called cash reserves, typically require you to have 2-4 months worth of mortgage payments in addition to the gift funds. The requirement for reserves is waived, however, if your gift is more than the reserve requirement, including all closing costs.

Now that's a deal!

Down Payment Assistance

There are organizations whose job it is to assist people with their down payments. Many times these are nonprofits dedicated to getting people into their first home. Being a first-time home buyer is usually a requirement, but not always.

Down payment assistance programs (DPAP's) will either loan you the money for a down payment and/or closing costs or flat out give it to you.

How much you’re awarded differs depending on the program. Some programs offer a percentage based on the home’s sale price, while others cap assistance at a certain dollar amount. When looking for programs to apply for, research their requirements, whether it’s a grant or loan and how much assistance you can receive.

How to Qualify

You have to contact one of these programs and ask. There are no universal guidelines, but most programs expect you to be a first-time homebuyer and to take an educational course (some require it, while some suggest it). Many ask that you fall into certain income limitations or live in a certain area, while others have no restrictions at all. Certain communities may in fact have more than one DPAP available while at the same time the county and state can have their own programs. If you don't qualify for one DPAP, find another.

How to Apply:

Start by researching what programs are available in your area, if any. HUD has a list of?local home buying programs by state. Make sure your mortgage lender works with the program. (I do)

Can I get additional down payment assistance with an FHA loan?

While the FHA does not offer its own down payment assistance, you may still be able to get help with your down payment through a program. Take note: Assistance for?closing costs?on FHA loans is capped at 6%. For an?FHA loan, you have to put up some of your own money, but most down payment programs will work with FHA loans.

How To Buy A House If You Need To Sell Your House For A Down Payment?

Get a temporary loan on your current house, called a bridge loan, to cover down payment and closing costs for the new home.

It's also common to buy a new house on a "contingency" basis, meaning "I'll buy your house if I'm able to sell my current home." If the sellers of the property you want to buy have someone who is going to give them cash right now or who doesn't have a contingency clause, then you may lose out. Much depends upon the condition of the local real estate market; in a slow market, the seller may be willing to accept such conditions. However, I was able to dozens of these types of deals during the huge housing boom in the last couple of years.

The Bottom Line

Before considering how much money you need for a down payment and whether you’ll need assistance with paying for it, start the process of getting pre-approval for your mortgage. That way, you know how much house you can afford before saving for a down payment and closing on a property.

It’s possible to qualify for a mortgage from conventional lenders with a down payment as low as 3% of a home’s final purchase price. And if you need help coming up with an even smaller down payment, the down payment assistance programs offered by community organizations, government agencies and local lenders could help you clear this financial

hurdle.

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