Figuring Out the Down Payment
By Mark Nash
- Putting down 10 to 20 percent is the norm
- How to avoid paying private mortgage insurance
- Other ways to get a down payment
The days are gone of 100 percent financing on homes. Most lenders require home buyers to put at least five percent down. Even these programs are rare and require you to have an excellent credit score. The most common down payments are between 10 and 20 percent. Keep in mind that if you put less than 20 percent down you will be required to purchase private mortgage insurance, or PMI. This is an additional monthly payment, which basically means that you’re considered a greater risk to the lender with less than 20 percent equity in your home.
Some buyers need to be creative in coming up with their down payment. Don’t underestimate mortgage lenders who follow a paper trail in order to find out how you came up with your down payment cash. If it didn’t come out of a bank, retirement, or money market account, they will demand to know where it came from. Don’t use a charge card to receive a cash advance as your source of all or part of your down payment. This will only increase your debt ratio and may disqualify you for the loan. Following are some additional ways you can come up with the down payment.
Mom and dad
Most lenders will allow your parents to “gift” you the down payment. The lender will require them to sign what is known as a “gift letter,” which will prevent you from taking on additional debt to repay your down payment to your parents.
Individual Retirement Account (IRA) funds
If you are a first-time home buyer, the Internal Revenue Service allows you to withdraw and use $10,000 from an IRA towards your down payment. You don’t pay the early withdrawal penalty, but different IRA’s products may be considered income, which means you may get taxed. Check with your tax accountant before withdrawing funds from an IRA. If you are married you and your spouse can each withdraw up the maximum amount of $10,000. IRS rules define a first-time homebuyer as one who has not owned a home as a principal residence in the previous two years.
You can borrow from your 401(k) retirement plan for a down payment. However the IRS does not allow you any tax breaks if you do this. And, you have paid the money back into your 401(k).
Down-payment assistance programs
Some states, counties and local governments have down-payment assistance programs for first-time home buyers who meet certain income guidelines. They might require you to purchase a home in a targeted area being redeveloped. Ask your loan officer if where you plan on buying has any of these lucrative down-payment assistance programs.
Home seller assistance
In some situations, home sellers might “gift” you the down payment. But beware of programs where the seller makes a contribution to a nonprofit charity, and the charity gives a portion of the contribution to you as a gift. The program itself is not a problem, but the IRS has had issues with these programs and has contested tax exemptions in some cases.
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