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6 Different Down Payment Sources

I speak with a lot of prospective homebuyers and nearly always get the question “where can my down payment come from”?  It’s a good question because there are specific sourcing requirements regulated by underwriting guidelines with FHA, VA, USDA, and conventional financing.  Down Payments, next to income sourcing, cause the most headaches.  Below is a general idea of where the down payment for your home can come from.

Income Tax Refunds

This time of year is notorious for people thinking of buying a home largely due to anticipated tax refunds.  Tax refunds open the doors for paying down large chucks of debt and/or putting at least the minimum down payment up for buying a home.  This is an acceptable source of funds for down payments.

However, you should have these funds in your possession before you shop for a home.  Unfortunately, you risk deposits and money paid up front for services like a home inspection and appraisal if you start shopping too soon. 

401k Loan & IRA accounts

If your company offers a 401k retirement plan, you should be contributing to it every paycheck.  Over time, your vested balance builds and helps create some sense of retirement savings.  The majority of plans allow you to borrow against your 401k, creating opportunities to consolidate debt at a lower rate or fund the down payment needed for purchasing a home.  Every plan is different, but typically you can borrow up to 50% of your vested balance.  Many homebuyers I speak with do not realize the power of this asset.

Your payments on the loan come directly from your paycheck each pay period and are based on a loan term you set.  In addition, there is no credit check for this loan, and it does not count against you when calculating how much you qualify for because the money borrowed is secured by the balance.  The downside to this is most of the time, the money your loan is backed by may not be invested in the market, causing you to lose earning potential. 

The IRS allows a one-time first-time homebuyer penalty free withdrawal from your traditional IRA account of up to $10,000 for a down payment to purchase a home.  You will likely pay taxes on the money withdrawn, but not the 10% penalty for being less than 59 1/2.   Visit the IRS site for more details.

Gift Funds

Many people are surprised to learn that a family member or spouse can gift you the funds needed for the down payment to purchase a home.  If purchasing a primary residence, that gift can be 100% of the funds needed when it’s a FHA, VA, USDA or conventional loan.  Jumbo financing allows a gift of funds, but usually 5% of the funds needed must come from the borrower. 

If you have a family member willing to gift you the down payment, make sure you speak with your Loan Officer about how they should transfer the funds.  The paperwork gets tedious if you do not follow instructions and can cause anxiety for the donor.  For information concerning taxes & gifts, consult your tax preparer.

Your Money Saved & Small Business Account

Funds that have been seasoned more than 60 days in a bank account can be used for the down payment on a home.  The bank views this as a compensating factor when determining your loan eligibility.  It does not mean you will be denied a loan with the other forms of down payment.  Simply that the bank considers your ability to manage money in your favor for having saved up to buy a home.

If you are self-employed, your business funds can be used as a down payment for a home.  Certain requirements must be met for this to work.  But it is possible.

Cash on Hand

Probably the most common question we get is “can I use my mattress money for the down payment”?  The majority of the time the answer is no.  However, if we can show a pattern of cash withdrawals that add up to the cash you have on hand, then yes, it is possible to use cash on hand.  Certain requirements must be met such as reviewing 12 months of bank statements (or more) to “find” the cash withdrawals.

Trust me, it’s much better to have the other methods serve you with the down payment than this option.  I’ve done it before, and it was extremely time consuming for both the borrower and the underwriter.

1031 Exchanges & Equity on Sale of Home

A 1031 exchange is a tax code that allows the Investor to use the equity of the sale of a home (usually investment property) as the down payment on another home (usually investment property) to avoid paying the capital gains tax on the equity.  In cases where a borrower is selling their primary residence home and the equity is above the maximum allowed where taxes would be due, they can also do a 1031 exchange on the home they are buying.

Most homebuyers won’t need to consider a 1031 exchange.  Yet, there are many circumstances you may decide to sell your current home and use the proceeds of that sale to purchase another home.  You may do this in a simultaneous closing scenario, meaning you do not need to have the cash in your account right away.  Certainly, your Real Estate agent will need to help prepare you accordingly.  But this is an option if you own a home and still need cash for purchasing a home.

 Summary

The list can actually go on with down payment types and sources.  This is a good chunk of the opportunity where a borrower might consider coming up with a down payment.  The amount of down payment needed will be discussed in another post but depends on the loan program, type of loan, investor requirements etc.  In addition, not mentioned are Down Payment Assistant Programs.  For now, use this as a general guide for understanding where you might be able to come up with a down payment.  Reach out if you have a scenario for us to run by!

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Beyond the Numbers

Owning a home can be as abstract as the American Dream.  It is what you make of it.  But I firmly believe there are fundamental values in Homeownership that go beyond the numbers.  I mention on my site, “a place to call home” as a bullet point of owning a home.  This is what I mean.

Homeownership brings families together

This idea is not the end all to solve all the world’s problems.  But it is a good start to promoting family values which in turn help contribute to good virtues in a culture.  These things can lead to economic development and a healthy outlook on life.  It’s that hope we long for in building our families and passing on a legacy to children.  Home is where traditions form or carry on which always help bring families together making our most precious commodity, time, of importance.  When we focus on our families in a comfortable setting, we are at home in some form.  In this case, it’s YOUR home. 

A voice in your community

A lot of attention today is focused on what is happening all around the world.  But what about your community or small neighborhood?  Homeownership has always promoted a vested interest in the community surrounding you; your neighbors, the local coffee shop or restaurant, High School athletics, small businesses, etc.  Who determines how the community is formed?  It’s always been the current Homeowners of today, not the owners of the past.  There is certainly a legacy to be honored with the past.  Continuing to maintain a community is also part of Homeownership. 

My personal experience with this has evolved in the last few years participating with the local Chamber of Commerce, events, and developing great relationships with my surrounding neighbors.  My reasons for being involved in some capacity were about creating a legacy for my kids and setting an example of what civic duty and responsibility looks and feels like.  The rewards have been abundantly great and created a vested interest in what happens with the future of the community we live in.

Homeownership & Stability

Owning your home certainly has its financial benefits.  Ways you can manage your equity can be found here.  Beyond the numbers it also promotes a sense of stability.  In times of a slow down with the economy or your business, your home may get you through the event because you developed good financial literacy in the process of ownership.  Your mortgage payment and overall household expenses are reasonable enough with budgeting and a slow period.  The added advantage is not needing to uproot your family because your lease is coming due or a Landlord wishes to sell the home to someone else.  While it’s not the ideal situation, selling might be what you need to gain new ground in starting over. 

None of us are immune to the risk of a slowdown.  In 2014, when I was beginning a new career, I sold my home to start over financially, using the equity to pay expenses.  While it was a difficult time, I was happy that I owned my home and had that opportunity.  Within 15 months, I bought a new home so that our family could have that sense of security once again.

Conclusion

Talking with people about the value of homeownership often brings about this kind of conversation.  The numbers can make sense to nearly everyone.  But the action of “taking the next step” is almost always because of a hope or dream of some kind.  It usually comes from the heart in the end.  That is truly beyond the numbers.