Beginner Guide to Buying a Home – Week 4

This step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and all the details in between. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks!

Saving for the down payment for your first home can seem daunting and insurmountable. You don’t want to use your entire savings when you purchase your home.

But this doesn’t have to be a barrier to homeownership!

Once you’ve determined your monthly budget and know what mortgage amount that translates to (seeDo the Math — A Mortgage You Can Afford article in the series), the next step is dealing with your down payment. 

Here is a rundown of ways to find that down payment as well as some great homebuyer assistance programs that can help reduce the amount taken out of your own pocket.

How Much Down? (It’s probably not 20%)

How much money you need for a down payment can depend on the type of mortgage you will get for your financing.

• You may qualify for a conventional loan that requires as little as 5% down, although some lenders may require 10 or 20% down, depending on your credit and other factors affecting your financial picture.  Most buyers can qualify with as little as 5% down, and you may too!
• FHA loans can require as little as 3.5% down.
• If you are a veteran, you can put 0 down! (Note that you will most likely need money for down payment when you sign the contract – but that can be used for your closing costs, and you can still finance 100% of the purchase price).  

The amount you put down is up to YOU. If you are a first-time homebuyer, you don’t want to use all your savings. You want to have a cushion in your savings account for unexpected expenses that could pop up. You should put down enough to buy your home and have a monthly payment that fits in the budget you calculated.

If you can’t put down 20% there is still a way to avoid paying monthly PMI, which is not normally tax deductible (your accountant can advise you on your actual situation) so most people want to avoid it.

An alternative could be lender paid PMI, where the lender pays the PMI BUT you pay a slightly higher interest rate. If you don’t have 20% down or don’t qualify for down payment assistance plans, this may be an option for you. Your mortgage payments will be slightly higher but you won’t be paying the PMI costs. When you sit with your mortgage person, they can run the numbers, and this will help you determine which is better Lender paid PMI with a higher rate or just paying the PMI each month.

Once you narrow down your mortgage options and consider any homebuyer assistance programs, you’ll have a better idea of how much you’ll actually need for your down payment. Next week you’ll learn more about mortgage options out there so stay tuned for that!

Here’s a rundown of where to find money for your down payment:

Help from Homebuyer Assistance Programs

As a first-time homebuyer, you may qualify for many of the state and local assistance programs available, SONYMA (State of NY Mortgage Assistance) has programs that offer lower interest rates, down payment assistance etc. In Westchester you may qualify for CHI (Community Housing Innovations). These are just two of the potential options you have.

It’s worth exploring these options if you are a first-time home buyer with a moderate income. Remember these programs can be used for condominiums and COOPs if you meet the condo or coop requirements.

There are many assistance programs you may qualify for so make sure you follow up and explore when you start setting your budget and figuring out your down payment options.

I can give you a complete update of current programs for first-time buyers. Don’t hesitate to contact me.

Should You Tap into Your Retirement Accounts?

You may be able to tap into that/those retirement account(s) you thought were not available to you. This may not be the best choice for you, but you should explore them if you need money for your down payment.

Keep in mind, there are strict rules around borrowing from or removing these funds, and you should always consult with an advisor to clearly understand any tax implications, pay back rules, etc.

• Borrow From Your 401(k) Plan. Check with your employer to see if your 401(k) plan allows for loans. You can borrow $10,000 or half your vested value (the amount you are entitled to if you leave the company) whichever is greater. Or if your vested balance is more than $20,000  you can borrower one-half of your vested balance in the plan or $50,000 whichever is less.

Note that if you were leave or lose your job you will most likely have to repay the entire amount within 60 days or less. If you don’t it could trigger tax consequences and penalties on the outstanding amount. Make sure you understand all the terms, tax penalties etc. before going this route.

Withdraw Funds From Your IRA. Usually, money in an IRA can’t be withdrawn before age 59 ½ without incurring a 10% penalty. However, if you’re a first-time buyer or someone who hasn’t owned a principal residence for two years prior to signing a binding sales contract you may not have to worry about a penalty. If you meet the requirements, you can withdraw up to $10,000 penalty-free from an IRA for a down payment.  If your spouse is also a first-time buyer, they can also pull from their retirement account giving you a total of $20,000 towards your down payment.

Keep in mind, any withdrawals from a traditional IRA are considered taxable income and must be reported. This $10,000 is a lifetime limit — and must be used within 120 days of receiving it.

• Withdraw Funds from Roth IRA. If you are invested in a Roth IRA the rules are different. If you have had your Roth IRA for at least 5 years you can take $10,000 as a qualified distribution.  In other words, you can withdraw the money without penalty, and it won’t be considered income as the earnings are tax-free.

Reach Out to Friends and Family

Another great source of money for a down payment is family. You may be reluctant to take money from family but in a pinch, it could get you to your goal. You will need to be clear on if it is a loan or a gift.  Your parents might have taken this route when they bought their first house!

• Gift from Family. Immediate family will often help with home purchases. Gifts up to $14,000 per year per person can be given without worrying about the gift tax. This means, for example, that every year your mother and father can give you and your spouse a total of $56,000 without having to file a gift tax return. Documentation is required so you need a letter stating that the money is indeed a gift with no expectation of repayment.
• Borrow from Family or Friends. You may prefer to get the money as a loan. If you do arrange a loan you will need to disclose this to your lender as they will need to consider the repayments as part of your debt.  The amount will impact your debt-to-income ratio and could affect the lenders decision to loan you money.
• Boost Your Savings You have complete control over your savings. The sooner you start the more you will have available when you are ready to take the plunge into homeownership.
• Tax Refund.  You can change your withholding to 0. You will receive less in your paycheck each week, but you will get the money back in a lump sum as a refund. You can then put the whole amount towards your down payment. It’s a way to force the savings and keep you from spending it throughout the year.
• Deposit $$ in Bank Regularly.  You’ve probably heard the saying “Pay yourself first”. In other words, when you get your paycheck, the first thing you should do is move a fixed amount to your savings account, or better yet have it automatically transferred to a savings account. If you are paid twice a month and you save $250 every paycheck you will have $6,000 at the end of the year. Not bad!
• Sell Stuff on eBay or Craig’s List. Everyone has unwanted items that take up space. Consider selling these items and put that money toward your down payment.

Do you still need to make sense of all the mortgage options out there. I’m happy to discuss your specific financial situation and what’s possible for you. This is the biggest barrier for most buyers who can afford a home because they are unaware of all the options available to them. Don’t let a lack of information keep you from becoming a homeowner. 

If your lack of down payment monies is stopping you from buying a home, email me  with your questions or schedule a time to talk more and see!  I can help you assess your situation and determine if you can move forward now or if it would be better for you to wait a few months or years. 

Next week’s article goes over all the details in the Five Steps to Obtaining a Mortgage.  If I don’t hear from you before then, enjoy your week and stay tuned to next week’s article for even more information about how to get the best loan for YOU!