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The Down Payment
The amount you have available for a down payment will affect what types of loans for which you can qualify. Down payments typically range from 3 to 20 percent of the sales price for the property. While we have a number of great loans that allow for 100% financing, the borrower must still cover the cloisng costs or split them with the seller (allowable depnding on loan program and lender). Note that there are also 103% and 107% loans designed to cover these costs but they are very expensive, in terms of rate, and always carry mortgage insurance requirements. We have access to them, but because of their cost - we really do not offer them with with enthusiasm. So, especially for the first time home buyer, it's always a good idea to have money set aside for down payment or closing. In a fast appreciation area, such as the Bay Area, Las Vegas, certain areas of Southern CA, it may be financially wiser NOT to put a lot of cash into the down, if any.
Tips for Accumulating a Down Payment
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Save
Look for ways to reduce your monthly expenditures to save toward a down-payment. You could enroll for an automatic savings plan at your bank to have a portion of your payroll automatically transferred into savings. Most people save a couple of years for their down payment.
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Borrow the down payment from your retirement plan
Check the provisions of your retirement plan. You can borrow funds from a 401(k) plan for a down payment or make a withdrawal from an Individual Retirement Account. Be sure you understand the tax consequences, repayment terms and/or possible early withdrawal penalties.
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Move
You may be able to save additional funds if you can move into less expensive housing.
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Reduce other higher interest rate debt
Paying off credit cards will initially reduce your savings, but the money you will save from higher interest rates will pay-off in the long run.
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Make a deal with the seller
In some circumstances, it is appropriate to ask the seller to carry a second-mortgage to cover your down payment. Typically, you will pay a slightly higher rate for this second mortgage. This is good for someone with highly damaged credit or no credit. This can be done but not usually in a "hot" market such as Bay Area, Tahoe, Las Vegas, San Diego, etc... but one should always ask! When we're dealing with closing costs, it never hurts to have your realtor make the offer with a request that the seller pay closing costs. They may say yes, or agree to a split. But if you don't ask, you don't get. Always ask. Especially with FSBOs!
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Sell some investments
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Get a second job and save your earnings
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Skip a year's vacation
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Gift from Family
Parents and other family members are often anxious to help children buy their first home and may have the means to give you a gift of money for a portion or all of your down payment. |
Alternative Sources
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Documenting Your Down Payment
Documenting that the down payment comes from your savings and that you will have savings and/or assets over and above the down payment gives the lender confidence in your strength as a borrower and your ability to repay the loan.
Take extra care to document the sources for any monies to be used for the down payment or closing costs.
Acceptable Down Payment & Closing Costs Sources
- Cash in a bank account
- Mutual funds / stocks / IRA / 401K
- Proceeds from the sale of another property
- Gift from an immediate relative
Click here to learn more about verifying your down payment, closing costs, income and debt. |
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