“For first-time homebuyers, generally the biggest obstacle to buying a home is the ability to have a down payment,” said Susan Dewey, executive director of the Virginia Housing Development Authority. Consumers struggling to come up with a sufficient down payment, however, may have more options than they realize, as government programs, existing assets and personal finance techniques can be used to obtain the capital.
Here are nine ways that consumers can get their hands on the down-payment cash they need to purchase a home.
VA, USDA: Veterans and active duty personnel, as well as some members of the National Guard and military reserves, can qualify for zero-down-payment mortgages through the U.S. Department of Veterans Affairs. Such home loans are made by private lenders but backed by the agency. Although participants in this program must pay a so-called funding fee, its costs can be rolled into the loan. Closing costs, meanwhile, can be paid by the seller.
“Essentially, the veteran can get into a home with no money out of pocket, and the interest rates are typically very good,” said Paula Miller, the Region 3 vice president for the National Association of Realtors.
To qualify for the program, borrowers must meet the agency’s income and credit standards. For more information, contact a VA-approved lender, one of the agency’s regional loan centers or a Realtor. Similar zero-down-payment mortgages are available through the U.S. Department of Agriculture Rural Development program. To determine eligibility, contact your local rural development office.
State programs: Consumers can also get down-payment assistance through their state housing finance agency. Although offerings vary by state, such agencies can help first-time buyers by providing grants, subsidized home loans and other programs, said Dewey, who also serves as the president of the National Council of State Housing Agencies. The Virginia Housing Development Authority, for example, can provide eligible first-time buyers with federally insured home loans, including second mortgages to cover the down payment and closing costs.
“We can finance slightly above 100 percent (of the purchase),” Dewey said.
Such buyers must meet requirements on credit, income and home sales price. To find out if you qualify for similar assistance, contact your local state housing finance agency.
FHA: Borrowers who aren’t eligible for zero-down-payment mortgage programs can still obtain low-down-payment home loans through the Federal Housing Administration. The FHA is a federal agency that insures private lenders against default. Qualified borrowers can access FHA-backed mortgages for as little as 3.5 percent down. These liberal requirements have helped turn the once-sleepy agency into an essential component in the effort to revive the housing market. Although FHA-insured loans represented just 3 percent of the home-purchase mortgage market in 2006, the agency backs about 30 percent of home-purchase loans today. FHA-backed loans are subject to credit and mortgage-size requirements. To see if you qualify, contact an FHA-approved lender near you.
Gifting cash: If you don’t have enough cash on hand, a good first step is to see if anyone close to you does, said Keith Gumbinger of HSH.com.
“Do you have anybody who can give you money: your parents, a rich uncle or your grandparents?” Gumbinger said.
Gifts from parents or other family members have long been a source of down-payment cash for young couples or first-time buyers.
“Those gifts have to actually be documented as gifts,” Gumbinger said. “You must get something (in writing) from each of those donors that says there is no obligation to pay back the money.”
Be aware, however, that cash gifts from a single source that exceed $13,000 per individual, or $26,000 per couple, are subject to federal taxes.
Tap your IRA: Certain homebuyers can use funds from their IRA to cover down-payment costs without incurring the 10 percent early withdrawal penalty. Individuals who are under age 591/2 and have not owned a home within the preceding two years can withdraw up to $10,000 penalty-free from their IRA to put toward a real estate purchase. The cash can be used for acquisition, financing or closing costs . Retirement savings, however, should not be the first place you look for cash. Only take money from your IRA after exploring all alternatives.
Use your 401(k): Although would-be homebuyers may be able to access cash from their 401(k) for a down payment on a principal residence, they must first demonstrate a severe financial hardship. Many financial advisers advise against withdrawing funds from your 401(k) unless you have exhausted all other options. (That’s your retirement nest egg, after all.) In addition, some 401(k) plans allow participants to borrow a portion of the funds they’ve saved up to cover a down payment or other expenses. Plans that permit such loans typically provide access to as much as half of the vested account balance, not to exceed $50,000. But once again, homebuyers should consider tapping their 401(k) for down-payment cash only as a last resort.
Savings plan: Although it might take a little time and discipline, an old-fashioned savings plan can be a great way for consumers to put together enough cash for a down payment. For assistance in creating a savings plan, consider reaching out to a certified credit counselor, said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling.
“To have an objective third party look at your finances and find hidden money within your budget is a super idea,” Cunningham said. “They can find things which you may not have thought of.”
Selling assets: Some of your down-payment cash could be sitting right in front of you, Gumbinger said.
“You may consider looking through all of the stuff that you have accumulated and see if there are things that you might be able to sell that you don’t need,” he said. “If you have got three flat-screen TVs in your apartment because they were cheap and you just started accumulating them, see if you can’t get rid of some of those assets, and see if they can be turned into something that’s going to be more productive for you.”
Once you’ve assembled items you would be willing to sell, consider holding a garage sale or putting them on eBay.
Second job: Additional income, of course, can also help would-be buyers save enough cash for a down payment. But with a high national unemployment rate, such work may be difficult to find. Still, it’s worth seeing if there is any freelance work you might be able to take on, or checking with your friends who work in retail to see about any part-time openings or seasonal work.
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