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Securing Funds for a Down Payment

By Staff
In the past, no-down payment mortgages were relatively common. Since the sub-prime mortgage meltdown, however, these mortgage products are practically extinct. In the current lending environment, unless you qualify for a VA or USDA loan, you will have to come up with a down payment to buy a home.

How much down payment you will need depends on the circumstances. If the property you plan on buying qualifies for an FHA loan and it falls within FHA loan limits, you only need 3.5% of the purchase price. Otherwise, you will likely need at least 10%. For Now, Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE) have capped the loan-to-value ratio for conventional loans at 90%, so the vast majority of lenders are unwilling to loan more than that amount.

Nowadays, coming up with a down payment may be much harder than it has been in the past. Sellers could finance part of a buyer’s down payment by making contributions to charitable organizations like AmeriDream, which would then provide down payment assistance for the buyer. However, after investigations showed that borrowers were more than twice as likely to default after receiving such assistance, the Federal Housing Administration banned the arrangement. Seller contributions are now limited to closing costs

Borrowers still have a number of avenues they can explore to come up with money for a down payment, however. Here are some you should consider:

Gifted Funds:  Borrowers can receive down payment help in the form of a gift from family, close friends, employers or charitable organizations but not any interested parties like the seller, real estate agent or builder. However, donors should be aware of gift-tax exclusion amounts, to avoid paying taxes on their gift. The tax law currently provides for a $13,000 gift-tax exclusion per donor, per recipient.

Down Payment Assistance Programs:  While seller-financed down payment programs are prohibited, there are other programs that help borrowers come up with a down payment. Some nonprofit organizations provide grants for struggling buyers, and there may be funds available from your state-sponsored programs if you qualify. These programs are typically geared toward low-income borrowers.

Pull Money From Your IRA:  First time homeowners are permitted to withdraw up to $10,000 ($20,000 for married first-timers) from their IRA accounts for down payments without being penalized. According to the IRS, you are a first-time homebuyer if you have not owned a property for the previous two years. You will, however, be taxed on these funds if you are withdrawing from a traditional IRA or dip into the earnings of a Roth IRA. Depending on your tax bracket, that could significantly diminish the amount you net. Additionally, you’ll be sacrificing the opportunity to earn much more money for retirement. If you do go this route, it’s best to pay back what you take as soon as possible so your dreams of homeownership don’t thwart your dreams of retirement.

Get a 401(k) Loan:  You can borrow from your 401(k) account to pay for a down payment, but you’ll have to pay the loan back with interest. On the plus side, the interest you pay is going back into your 401(k), but this option has the same downsides as tapping your IRA.

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