August 12th, 2011
Coming up with enough money for a down payment is the largest challenge of purchasing a home for many young people. With rent and bills, it can take years of saving up before you have enough to put down.
In her blog post “5 Insider Secrets for Coming Up With Cash for Down Payment” Tara-Nicholle Nelson offers some fantastic tips for coming up with the cash for a down payment.
Gifts from Family. Home buyers are typically allowed to use gift money from family members towards their down payment – as long as the home buyer has a letter from the giver verifying that the money is a gift and not a loan. The giver must be a relative, as friends are more likely to expect you to repay the money down the road.
Nelson explains the rules and restrictions in further details:
FHA loans will allow the gift to make up any portion or all of the buyer’s down payment, many conventional (non-FHA) loan programs will restrict the proportion of a buyer’s down payment that can come from gift money. The lender may also have specific ways they want to see the money go into and out of your accounts. Before you accept a gift toward your down payment, be sure to check with your mortgage broker or loan rep to be sure that you’re dotting all the right i’s and crossing all the right t’s.
The FHA Bridal Registry. This is a GREAT idea that far too many young people don’t know about. Originating in 1996, the FHA Bridal Registry allows wanna-be home buyers to open an interest bearing savings account for family and friends to use to make gift payments to go toward an FHA 3.5% down payment. Those who want to contribute can either deposit funds directly into the account or they can give cash or a check to the account holder to deposit.
This is a great addition to the family gift concept because givers don’t need to be relatives, and letters from the givers aren’t required.
Nelson adds that you don’t actually have to be a prenuptial couple to use it, either. You can use this program to collect gifts for any occasion, like a graduation. Only requirement is proof of a saving account titled “bridal registry account.”
Your Employer. You may have access to an assistance program if you’re an employee of the government, a university, or large or financial company. For example, Nelson says some cities give down payment grants to firefighters and police officers who buy properties in that city where they are on-call. Check with your Human Resources department to see if any such program is available to you.
City/County/State Programs. Government programs that serve as an incentive to purchase a home are always in place. These programs vary widely, but some target people looking to buy a foreclosed home, while others aim to help those with low and moderate incomes. Some don’t have to be repaid if they buyer remains in the property as their primary residence for 30 years. Most of these programs require the buyer to fulfill a homeowner education component. To learn more, visit your city, county and state websites to learn about programs that might be able to help you.
Your Retirement Funds. If you have a 401K or Roth IRA account in place you may be able to borrow from it for your down payment. According to Nelson,
Currently, you can take up to $10,000 out of your Traditional IRA with no penalty to put toward the purchase of your first home, but you will be taxed. You can take as much as you want out of your Roth IRA contributions with no penalty or taxes, though, and as much as $10,000 from your earnings penalty-free for your down payment. The rules get a little tricky, here, so definitely check in with your tax and financial advisors.