Last week I wrote about how first-time home buyers can buy a home with as little as $1,000 out of pocket, but the rest of us may be challenged to come up with down payment money when we buy a home.
Many buyers assume that lenders require a 20% down payment, but that’s not necessarily true. There are loans available from many lenders with as little as 3% down payment. FHA requires 3.5%down, and qualified veterans can get a 0% down VA loan. On conventional loans the interest rate charged will probably be higher, but with rates for conventional loans so low, what’s an additional quarter percentage point or so anyway?
And don’t assume that every loan with less than 20% down payment requires mortgage insurance, which can be expensive. Often mortgage insurance is waived in exchange for a slightly higher interest rate.
So, first determine how much money you will need for your down payment, and shop around with different lenders, since this requirement can vary greatly. Generally, I recommend mortgage brokers instead of banks, because banks only sell their own loan products, but mortgage brokers can sell multiple products from multiple lenders, including special products for first responders, teachers, medical personnel, and others.
Once you know the amount you need to raise, how can you raise it when you don’t have that much cash in the bank?
Start your quest by asking advice from your loan officer. A good loan officer, like Jaxzann Riggs of The Mortgage Network, will be able to make suggestions once she (or he) has a full picture of your financial situation and assets.
Strategies I’ve seen employed include the following.
1) If you own a home currently and have substantial equity in it, you can borrow against that equity with a Home Equity Line of Credit or HELOC. Credit unions are good at issuing these loans to its members, but if you’re planning on selling, you need to apply for a HELOC before you put your home on the market. Since these loans have little or no closing costs and you don’t pay interest until you actually draw on that line of credit, there’s no reason not to have a HELOC in place right now and certainly ahead of needing the money. It’s like having money in the bank — literally.
2) If you have a high-balance IRA or other retirement fund, you may be able to withdraw money from it without penalty if you return that money within a couple months, so this is a good strategy if you need the money from selling your current home but don’t want to make an offer on your replacement home that is contingent on selling your current home. A loan against your 401K carries no penalty, I’m told.
3) If you own stocks and bonds but don’t want to sell them, consider using them as collateral for a loan.
4) Relatives or friends can gift you with money, but speak to your loan officer about documentation requirements. As you may know, anyone can give up to $15,000 per year to anyone else without paying gift tax.
5) Another option is a bridge loan. This option carries a higher interest rate, but it could be your answer. Ask your loan officer.
6) Get creative! If you’re engaged, how about a bridal registry for down payment funds? A GoFundMe campaign might work for you, too. If you have no loan on your car and it’s worth a lot, credit unions will lend you money against it. (I did that once.) You may own jewelry or other valuables to which you are not so terribly attached that you might be willing to sell them. (Rita and I have done that, too.)