Down Payment
The
amount you have available for a down payment will affect what types of mortgage loans
for which you can qualify. The mortgage down payments typically range from 3 to 20 percent
of the sales price for the property.
Tips for Accumulating a Mortgage Down Payment
-
Save
Look for ways to reduce your monthly expenditures to
save toward a down-payment. You could enroll for an
automatic savings plan at your bank to have a portion
of your payroll automatically transferred into
savings. Most people save a couple of years for their
down payment.
-
Borrow the down payment from
your retirement plan
Check the provisions of your retirement plan. You can
borrow funds from a 401(k) plan for a down payment or
make a withdrawal from an Individual Retirement
Account. Be sure you understand the tax consequences,
repayment terms and/or possible early withdrawal
penalties.
-
Move
You may be able to save additional funds if you can
move into less expensive housing.
-
Reduce other higher interest
rate debt
Paying off credit cards will initially reduce your
savings, but the money you will save from higher
interest rates will pay-off in the long run.
-
Make a deal with the seller
In some circumstances, it is appropriate to ask the
seller to carry a second-mortgage to cover your down
payment. Typically, you will pay a slightly higher
rate for this second mortgage.
-
Sell some investments
-
Get a second job and save
your earnings
-
Skip a year's vacation
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Gift from Family
Parents and other family members are often anxious to
help children buy their first home and may have the
means to give you a gift of money for a portion or all
of your down payment.
Alternative Sources
No down and low down Mortgages
-
FHA Loans
The Federal Housing Authority (FHA), which is part of the U.S. Department of
Housing and Urban Development (HUD), plays a significant role in helping low-
to moderate-income families qualify for mortgages. FHA assists first-time
buyers and others who would not qualify for a conventional loan, by providing
mortgage insurance to private lenders. Interest rates for an FHA loan are
usually the going market rate, while the down payment requirements for an FHA
loan are lower than conventional loans. The required down payment can be as low
as 3 percent and the closing costs can be included in the mortgage amount.
-
VA Loans
VA Loans are guaranteed by the U.S. Department of Veterans Affairs. Service
persons and veterans can qualify for a VA Loan, which usually offers a
competitive fixed interest rate, no down payment and limited closing costs.
While the VA does not issue the loans, it does issue a certificate of
eligibility required to apply for a VA loan.
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Piggy back Loans
A second mortgage that closes with the first. Often the first mortgage is
for 80% of the purchase price and the piggy back is for 10%. The home buyer
covers the remaining 10% with their down payment. (Some lenders will write a
second mortgage of 15% or even 20% of the purchase price.)
-
Carry Back Mortgage
In the case of the seller carrying back a second mortgage, the seller loans
you part of his or her equity. In this scenario, you would finance the majority
of the loan with a traditional mortgage lender and finance the remaining amount
with the seller. Typically you will pay a slightly higher interest rate on the
loan financed by the seller.
-
Housing Finance Agencies
These agencies offer special loan programs to low-
and moderate-income buyers, buyers interested in
rehabilitating a home in a targeted area, and other
groups as defined by the agency. Working through a
housing finance agency, you can receive a below market
interest rate, down payment assistance and other
incentives.
The primary mission of
Housing Finance Agencies is to boost home ownership
in targeted areas, among first-time buyers and those
with little money for down payments. Most of these
non-profit agencies were funded with state
government seed money and now operate independently.
Documenting Your Down
Payment
Documenting that the down
payment comes from your savings and that you will have
savings and/or assets over and above the down payment
gives the lender confidence in your strength as a
borrower and your ability to repay the loan.
Take extra care to document the
sources for any monies to be used for the down payment
or closing costs.
Acceptable Down Payment &
Closing Costs Sources
- Cash in a bank account
- Mutual funds / stocks /
IRA / 401K
- Proceeds from the sale of
another property
- Gift from an immediate
relative
