One of the biggest obstacles for home buyers is having enough cash up front. Many home buyers qualify for the monthly housing payment, yet they don’t have enough cash to cover the down payment and closing costs. While this can seem daunting, there are some ways to get around this financial obstacle.
Check the California database of current down payment programs!
When Do I Need a Down Payment?
Most buyers need to provide a down payment to purchase a home. For FHA loans, the minimum down payment is 3.5%. For many conventional loans, the minimum down payment is 3% or 5%, depending on the purchase price and the conforming loan limit in your county.
While these requirements affect most buyers, there are two ways to buy with $0 down:
- You are a VA borrower. Check with your lender to determine your maximum borrowing amount.
- You are using a down payment assistance program that funds your entire down payment, often as a silent second mortgage. (Read more about down payment assistance programs.)
So what if you do need the cash to buy, but you don’t quite have enough? The good news is that you may not need your own savings to fund your down payment. Lenders allow a few alternatives: a gift from a family member, and an equity loan from a property that you already own, or a withdrawal from a retirement account.
Option #1: Gift from a Family Member
This is the easiest, and luckiest, option for a home buyer. If you are fortunate enough to have a generous family member, you can receive your down payment as a gift. The family member can pay these funds directly into the escrow account. Your lender will require a gift letter, stating that these funds are a gift and not a loan. Also, keep in mind that the donor must be a relative, and not an employer or a friend. Finally, be sure to consult your loan officer for details and eligibility rules.
Option #2: Equity Loan or Line of Credit
Another option is available if you own a property with sufficient equity. You can take out a Home Equity Loan or Home Equity Line of Credit (HELOC) for your existing property, and use those funds for your down payment. I prefer credit unions for this type of financing, because they often charge no fees, and also very competitive interest rates.
Option #3: Investment Account Withdrawal
If you have an IRA (including a Roth IRA), a 401k, a TSP, or another type of retirement account, you may be able to withdraw funds in order to fund your down payment.
Typically, you can borrow up to 50% of your vested balance, not to exceed $50,000. You can take either a loan or a distribution. If you take a loan, you pay yourself back with interest, which is automatically deducted from your paycheck. In addition, you don’t have to worry about the loan affecting your mortgage qualification. The lender will not count this loan into your debt-to-income ratio.
If you take a distribution, which means you won’t pay it back, you can withdraw up to the entire balance. In some cases, if you’re under 65, you’ll have to pay a 10% early withdrawal penalty plus a 20% withholding for tax purposes.
Contact your retirement plan provider, and ask about terms of a loan or withdrawal.
The Bottom Line
Unless you qualify for $0 down VA financing, you will probably need a down payment when you buy a home, due to lender requirements. While that seems daunting, lenders currently allow low down payments, depending on the purchase price. As a result, many people can buy a home with as little as 3% down.
UPDATE: Effective 2020, there is a no-cost online home buyer workshop. This new tutorial is a comprehensive homeownership education course. CreditSmart® Homebuyer U offers six modules to promote education, homebuyer preparedness, and financial management.
Contact me, or your lender, to review your options.
I couldn’t have written this article without the expert advice of Nick Richardson:
Nick Richardson is a mortgage banker with EZ Fundings in San Diego, California, NMLS #966361. He can help you finance or refinance properties located in California. Nick can answer all of your questions about mortgage programs, with no hassle, no obligation. Contact him at 760-402-6962 or e-mail nick@ezfundings.com.
