|Five ways to come up with down payment
To purchase a home, you will need a down payment of at least 3.5 percent of the purchase price.
Gone are the days of no down payment alternatives, down payment assistance and seller-offered programs to come up with the money needed to close escrow.
Here’s five ways to come up with the down payment to seal the deal:
1. Gift money: A gift from family or documented close relationship. The gift giver needs to provide a gift letter and paper trail for the monies they are gifting for the benefit of the buyer.
In other words, they’ll have to provide a bank account showing they had the ability to gift the money. In short, gift monies cannot be funds sitting at home in a safe.
2. 401k/retirement loan: Typically borrowed funds for a down payment are a no-go, but the exception is a 401(k) or equivalent retirement account (or current home equity line). Borrowing money from your 401(k) for your down payment is acceptable for obtaining a loan to buy a home.
*Note: depending on the terms of your loan, this could be counted as a liability and factored into your debt to income ratio.
3. Sale of goods: You can sell your recreational vehicle or toy and use the net proceeds from the transaction as your down payment.
For example, let’s say you decide to sell your boat for $10,000. You’ll need to provide the full bill of sale as well as the bank statement depositing those funds, matching the bill of sale dollars to your mortgage company.
The same goes for any other recreational vehicle or other personal item. The key is as long as it’s plausible and passes the litmus test and you can paper trail the movement of money, you should have no issues using those monies for the home purchase.
4. Trust funds, settlement awards, etc.: If you come into a chunk of change via an inheritance, settlement, lottery winning, trust fund disbursement, family buyout, even a gambling victory, all of these monies can be used for the down payment as long as the sourcing of the monies is fully documented and explained from A to Z.
Matching of the amounts of monies used to the original deposits will be needed when it comes time to approve the mortgage.
5. Line of credit/personal loan: Where a down payment is lacking, enter strength in income.
You can take out a line of credit or a personal loan, deposit the full funds into your bank account and after two months (two-month seasoning will be needed), the funds will be eligible for use in the house sale.
While a down payment is needed to purchase in the current real estate market, a prudent homebuyer would also have plans for having available funds for closing costs.
The same out of the box strategies listed above can also be used to procure these closing costs.
Closing costs on average run 3 percent of the purchase price. So, total funds to close would be 3 percent of purchase price plus 3.5 percent. Do your homework.
If you don’t have a down payment for a house or your down payment is coming from more than one source, make sure you talk to a lender.
A qualified mortgage company can help you navigate the best way to properly support and document your monies with underwriting.
Doing this on the front end will save a tremendous amount of time creating and gathering unnecessary paperwork.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.