If there’s anything that can prove to be a challenge to many homebuyers, it’s not so much whether they can afford the home on a month-to-month basis but whether they can pull together the funds needed for that down payment.
Obviously, the best way for first time homebuyers to come up with a down payment for a home is to save one.
That understood, sometimes your timeline may be a little more expedited, leaving you in a position where you need to come up with a large chunk of change pretty quickly.
Thankfully, there are solutions to be had. Here are a few and some things you might want to consider before running with any of these options.
Dip into your 401(k)
Most 401(k)s allow you to borrow up to 50% of the vested balance or up to $50,000 (which ever is lower).
Keep in mind though that you will have to pay yourself back with interest, as specified by your plan provider. The maximum loan term is usually only about five years and you will want to take Those payments into account as you calculate your monthly expenditures in purchasing a home. Keep in mind also that your creditor for your mortgage will want to account for that also.
If you don’t pay it back, there’s typically a 10% penalty and the money counts as income for tax purposes.
Crack your IRA
There is no penalty for tapping into your IRA if you were a first time homebuyer and unlike 401(k), you don’t have to repay what you take out of an IRA.
For now people affected by the Covid can withdraw up to $100,000 from the retirement accounts without penalty.
*Note: As things are ever-changing, be sure to discuss IRA and 401(k) options with your tax consultant and financial advisor to ensure you’re making a well-informed decision before pulling the trigger on these options!
Go Talk to HR
You can always ask if the company you work for has an employer assisted housing program. Companies hate employer turnover now as much as ever so what better way to keep you around then pitching in to help you buy a home? This may not be the standard among most companies Just yet but, it doesn’t hurt to ask to see if yours is one of these wonderful exceptions.
Explore State & City Programs
Local assistance programs often partner with banks, who hope to gain clientele they might miss out on otherwise. This is especially so for first-time homebuyers who tend to have the hardest time coming up with that initial deposit while they’re stuck in a renters loop and don’t have equity in a current home to leverage for these funds.
Get a Gift from Family or Friends
Friends or family can gift you cash, but you can only receive $15,000 tax-free from each giver.
You will also want to make sure that you communicate the source of these funds with your lender as they will often have additional requirements that must be met where gift money is helping to cover your down payment. You want to really be mindful of the language you use when talking to your lender. They typically don’t like to hear that you “borrowed” the money from a friend or family member which can imply that you will need to account for paying that back which can be of concern to them where they also want to be sure you can afford to pay the mortgage they are looking to extend.
From a relational standpoint, clear language is incredibly important and many advise against borrowing money from loved ones as it comes with a high risk of damaging the relationship further down the line, despite the best intentions between the parties. If it’s a gift, that does change things and is certainly a great help in nudging you over the down payment hill.
The Sum of It
The saying goes, necessity is the mother of invention. The challenges presented to buyers that weathered the last couple years in the market has certainly inspired some pretty creative solutions for coming up with a down payment in a pinch or finding added funds under rocks, and old shoeboxes and from every nook and cranny crack in the wall.
If you are looking to buy a home and find this to be a sticking point, make sure you reach out and ask the questions with those that help people login on the solutions all the time.
You’re welcome to give me a call, shoot me a text or drop me an email and I’m more than happy to share some great resources with you to help you find just the right solutions to meet your needs.