3 Ways to Make a Down Payment on a Home
A house is the most expensive investment that most people will make in their lives. Because of the size of the loan needed, banks typically want buyers to make a down payment on the purchase.
In some cases, the down payment is as low as 3.5 percent of the total loan on the house. In others, a payment of 20 percent is required. The more that the buyer can come up with for the down payment, the less they have to borrow, and the less they have to spend on expenses like Private Mortgage Insurance (PMI).
Those looking for ways to make a bigger down payment shouldn't overlook the following sources.
Look to Retirement Accounts
These tax advantaged accounts aren't just for the golden years. They can also be a great source of funding for a down payment on a home.
First-time home buyers can withdraw up to $10,000 from a Traditional or Roth IRA toward a down payment on a home without paying an early withdrawal penalty. Married couples can take up to $10,000 from each account. Contributions to a Roth IRA can be withdrawn without penalty.
401(k) accounts are also potential sources of funding, but this option is more complex than using an IRA. Funds from a 401(k) can be tapped in two different ways: taking a loan and withdrawing funds. Home buyers can borrow up to $50,000 from their 401(k) for a down payment. They'll need to pay interest, but the interest is paid into the account. The loan must be repaid within five years.
Borrowers can also withdraw from a 401(k), but many experts recommend against this. The individual will have to pay income taxes on the withdrawal. Additionally, borrowers younger than 59 1/2 will have to pay a 10 percent penalty fee.
Investigate Down Payment Assistance Programs
There are many programs available to borrowers that allow them to offer lower down payments when buying a home. Many of these allow borrowers to avoid expensive PMI, cutting their monthly cost for the life of their loan.
Many first-time borrowers qualify for Federal Housing Authority (FHA) loans. These come with a down payment as low as 3.5 percent, without the requirement of private mortgage insurance. Many banks also have private programs to assist buyers. Buyers should check with local banks to see what is available.
There are also programs that can help people in specific circumstances. For example, veterans and active-duty military can get help through a VA loan. These loans are available without requiring a down payment.
The Rules on Gifts from Family
If a family member has funds they are willing to give a home buyer, this good deed could work out for them both. The IRS allows gifts of up to $15,000 tax-free in any given year. If the gift is from a couple, they may be able to give up to $30,000 without taxes. Typically, the lender will want to have documentation of the gift and a confirmation of the relationship between giver and receiver.
While the amount needed for a down payment on a home loan can be substantial, it can be achievable. Buyers should make sure they have looked into all the options available to them to reduce the required down payment and to increase the amount they have available. By doing careful research now, they can keep costs manageable and achieve their dream of homeownership.