You Don't Have to Break Your Bank
Is the thought of a large down payment for purchasing your dream house holding you back? There are many diferent ways you could get help with a down payment. Below are some different options that could help.
If your parents could help you with a down payment, good news - some banks allow gift money from parents. And if they don't, it still may be possible to get a free helping hand from your parents, says Ian Aronovich, president of GovernmentAuctions.org, which provides information about assistance programs and government auctions of seized houses and other items. "When you submit your mortgage application, you generally have to provide the last two full months of bank statements. Anything that was deposited before that time period likely will not need an explanation," he says.
But you're still not necessarily in the clear. Although it is legal, borrowing money for a down payment may make it more difficult to qualify for a mortgage, says Ellen Davis, a senior mortgage lender for Corridor Mortgage Group in Columbia, Maryland. She explains, "If funds are borrowed for the down payment, the repayment of those monies, including the interest, must be used in the calculation of the borrower's debt-to-income ratios."
A borrower's debt-to-income ratio (DTI) is total monthly debt obligations divided by total monthly gross income, and that percentage can't go over approximately 40 percent, according to Davis. If you borrow money from your parents, it's considered a personal loan, and the monthly payments must be factored into your DTI, she says.
And don't count on a sweetheart deal from the "Bank of Mom and Dad." Davis says whether or not your parents actually require you to repay the loan, the mortgage lender will calculate it at a fair market percentage rate for the purposes of qualifying for a home loan.
There are interest-free loans for your down payment, or you could get a grant that you don't have to pay back. Those are just a couple types of down payment assistance programs that are out there for homebuyers, according to Aronovich. There are also low down payment, no-PMI programs for professionals like firemen, police, teachers, and doctors, he adds. Down payment assistance programs come in many forms and vary greatly from region to region, says Aronovich.
And if you thought that you earn too much to qualify for any down payment assistance, think again, says Gloria Shulman, a Southern California mortgage broker with 30 years experience and founder of Centek Capital. "In many cases, grants from state and local agencies go unused, because buyers don't think they qualify," she says. They wrongly assume that just because they aren't below the poverty line, they aren't eligible for assistance, Schulman says. But in many areas in the country, she says hopeful homeowners can earn more than the median income for their area and still get down payment assistance.
For instance, she says in California buyers can earn 120 percent of the median income in their county and still qualify for up to five percent of the price of a home toward down payment. And since it's a grant, you wouldn't have to pay it back, Schulman says. As an example, she says that in Orange County, California, a buyer could earn up to $98,000 and still qualify for a grant of up to five percent of the sale price of the home. These grants average from $5,000 to $10,000 and must be used toward the down payment of a single-family residence, she says.
For these types of programs, you'll need decent credit - a FICO credit score of 640 on a scale of 300 to 850 is often required - and documentation of your income, Schulman explains. Also, don't expect to get assistance and spend your own cash on new wood floors or mood lighting. "These organizations usually require you to exhaust all the assets you have first," says Bishoi S. Nageh, vice president of branch operations for Mortgage Network Solutions, a residential financing company.
In other words, if you have cash in a savings account, it's likely you'll have to put it toward the down payment before receiving any assistance. It might take a bit of work to find what fits your situation best, but here are a few sources to help you out:
• Google: Search for "down payment assistance in [your city]," recommends Nageh.
• Your local city hall and town municipal buildings: They should have information and brochures available to the public, says Nageh.
• The Public Housing Authority Association website: The Association has compiled a helpful list of local housing authority sites. Just find your area - listed by state, county, and city - and you'll be able to find helpful information on down payment assistance programs in your area.
• Your lender: Ask your mortgage lender about assistance programs in your area and whether you can qualify, which could save you some time, says Davis.
Your 401k could help, because you can borrow against it for a down payment, "This is very common, and if consumers are not leveraging this option, they should. It's a great benefit 401k plans give," says Nageh.
Aronovich adds, that with all the benefits of homeownership, such as tax write-offs, it is a good idea to take out at least the allowable $10,000 per person from your IRA to help you buy a home. If you're married you could take out even more - $20,000 - without a penalty. In many instances, you may not even have to take money out of your retirement accounts, lenders will count up to 60 percent of your IRA or 401k balance toward your reserves to qualify you for a mortgage, Aronovich says.
However, there are some conditions. First, consumers should understand that they are not withdrawing the money. That would be a horrible mistake for many reasons, including the huge penalties and taxes you'd pay for early withdrawal, says Nageh. Instead, you are borrowing the money, which means it will still be there when you retire. "When you borrow the money, you go on a payment plan to put it back in the 401k," says Nageh.
And when you borrow from these funds, the repayment is calculated as part of your debt-to-income ratio, says Davis. But more importantly, once you take the money out of the market, you lose the compounding effect of the money when it was in the market, which can take a long time to make up, she says. As a result, that may slow down your rate of return and stall your retirement fund goals, according to Davis.
For that reason, she always advises clients to speak to an accountant or financial planner before making this move. After all, saving for retirement and buying a home are two of the biggest and most important financial decisions of your life. And sacrificing one for the other is not always a great option.
So, the choice comes down to your individual goals and comfort levels. For many, owning their own home free and clear during their golden years relieves them of the stress of mortgage or rent payments. If so, borrowing now could be the right call.
The key, say all the experts, is weighing all the risks and rewards and making sure the move you make is right for you.
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Lang Premier Properties are Birmingham Realtors specializing in Oakland County Real Estate. Stephanie is an agent with Max Broock in Birmingham, Michigan. See what past clients have to say about Stephanie Lang. Lang Premier Properties looks out for your best interests when you purchase a new custom luxury home. We always recommend working with an experienced luxury real estate agent when buying a new luxury estate.