Down Payment Options When Buying a Home
A home loan is one of the largest financial commitments most people take on. Because of this, banks will almost always want the borrower to have a tangible stake from the beginning, in the form of a down payment. This lump sum can range from 3.5 percent of the house's value to 20 percent or more.
A larger down payment often can mean a better deal on the loan and lower costs over time. However, accruing the money for the down payment can be a challenge. These resources can help boost the sum available.
This is where most people start looking for the money for their down payment. Couples can draw on both individuals' savings to bolster the amount available for the down payment. Many people begin saving for a home years before they consider making a purchase. Putting aside a set percentage out of every pay check can add up more quickly than most people think.
Often, an IRA or 401(k) is the largest lump investment an individual has. The good news is that, while adhering to certain rules, these accounts can be used toward the down payment on a home.
Contributions to a Roth IRA can be withdrawn at any time with no penalty, because these accounts are funded with post-tax dollars.
If someone needs to touch the earnings on an account to contribute to their home's down payment, it still is often possible. First-time buyers can withdraw up to $10,000 from either a Traditional or a Roth IRA without penalty. Plus, if both partners have IRA accounts, they can withdraw up to $10,000 from each. If this is not a first-time purchase, or if the buyers need more, then they still have the option of making a withdrawal and paying the 10 percent penalty.
The last option is borrowing money from a 401(k). This is one that requires care, as the money typically must be repaid within a few months. Large penalties are possible if the borrower is not able to put back the funds before the deadline. Every employer's policies are different, however.
Borrowers who are lucky enough to have people in their lives who are willing to invest in the borrowers' future can also put some gift funds toward the purchase of a home. Parents, in-laws, siblings, and grandparents are typically all eligible to contribute funds toward a down payment.
However, it is a good idea for borrowers to make sure their lender is okay with the funds coming from a gift. Some lenders wish to see part or all of the funds come from savings, as this demonstrates the borrower can put aside extra money. In most cases, the lender will also require proof that the money is a gift and not a loan that will have to be repaid at a later date.
There are no technical limits on gift amounts. However, gifts over $13,000 from each donor are subject to taxes.
Borrowers who are looking for the best deal on a loan can tap a range of sources in order to increase the size of their down payment. Often, this can mean skipping expenses like private mortgage insurance or getting a better interest rate to save money over the life of a loan. By exercising some creativity, borrowers can up the sum and improve their chances of getting a favorable loan and the home they want.