Whether you’re a first time home buyer or getting ready to retire and buy your “forever” home, you’ll need to consider how much you’ll need to have for a down payment as well as pay for closing costs associated with getting a mortgage. Some loans such as the VA and USDA programs don’t require a down payment but there are still closing costs to consider. If you’re looking at a 3.5% down payment for an FHA loan in Jupiter or you want to put 20-25% down for a jumbo loan in Miami, it’s time to open up your bank and investment accounts to see how much you’ll need. Here are the approved sources for down payment and closing cost funds.
This is perhaps the first and most obvious source for funds to close, your bank accounts. Funds can come from a checking or savings account and the accounts must have your name listed on the statement. If there is more than one name on the account that is not buying the house with you, you’ll only be allowed to use half the amount listed in the account or otherwise have the individual on the account with you provide a statement showing that you can use as much of the funds as you want. Lenders will also look to see if there are any irregular deposits. If you get paid on the 1st and 15th of every month, the lender knows it’s from your employer. If there is an amount of say $5,000 that pops up on the 10th, you’ll need to document the source before it can be counted when certain threshold tolerances are exceeded.
Do you have an IRA or 401(k) plan? It’s possible you can use these funds to help pay for closing costs and a down payment. If you’re a first time buyer and not of retirement age, you can withdraw as much as $10,000 from an IRA without incurring an early withdrawal penalty. Most 401(k) programs allow employees to take out a loan of up to 50% of the employees’ vested balance. In certain cases you may be able to liquidate all or a portion of your 401k for down payment. Your human resources department can let you know if you can borrow from the account and under what terms.
Sale of Personal Property
Any item that you own that can be appraised can be sold or borrowed against as long as the asset can be appraised by an independent appraiser. This means you can sell a car you own or take out a loan against it. When borrowing funds to close, it must be secured and cannot be cash taken out from a credit card or a personal loan. Make sure you document the current market value of the item and keep copies of the transaction showing the amount you received as a result of the sale and that you deposited those funds into an account you own.
You may also receive a financial gift from a qualified source. Most gift funds come from family members such as a parent or other relative. Other eligible sources for gift funds include qualified non-profit organizations. Gift funds, like the sale of personal property, must be documented including the donor’s name, the amount and the amount of the deposit made. Government loans also require proof that the donor has the ability to make the gift to you in the form of a bank statement.
For closing costs You may also get funds from the sellers of the property. Different loan programs have different limits on how much sellers can help out. For example, VA loans limit the amount of seller contributions to 4.0% of the sales price.
You can also ask the lender for some help. Lenders can work with you and adjust the interest rate on your home loan and provide a lender credit toward your closing costs at the settlement table. With a slight increase in rate, there can be a credit available. This credit is based upon the loan amount and the adjustment in rate.