Planning to buy a home sometime soon? It's an expensive proposition, and if you need help coming up with a down payment, it's important to know which sources you can tap to make your home-buying dreams come true. Here are four ways to borrow a down payment.
1. 401(k) retirement plans or liquid assets
Many 401(k) plans have special borrowing provisions that allow you to repay the amount borrowed with preferential terms. Some 401(k) plans even allow you to avoid penalties buying a primary home, while others have fewer restrictions for first-time homebuyers (defined as someone who hasn't owned a home in the past 36 months). Every 401(k) plan is different so check for details with your Human Resources department. Additionally, if you have liquid assets, your financial institution may allow you to take a loan against your cash.
2. Home equity line of credit
If you already own a home and are looking to purchase a second home or even an investment property, you can borrow money from a home equity line of credit. This option exists so long as your income and debt picture supports repayment of the line of credit as well as the other monthly carrying costs (taxes, insurance, homeowner association fees, private mortgage insurance, etc.).
3. Cash-out refinancing
Another way to buy a home is to leverage the value of your current home. Known as cash out refinancing, it can provide you with money equal to up to 80% of the value on your primary home, and a bit less if the home is rental property (70%) or a second home (75%). Your specific scenario might present different loan-to-value restrictions, so be sure to talk to a qualified loan officer.
4. Personal loan
A cash deposit to your account acquired from a personal loan may be considered eligible only after 60 days of "seasoning." Seasoning is a banking term that refers to the timeframe funds are in a bank account for use in a mortgage transaction.
Mortgage tip: Banks and lenders want to know that you have the financial capacity to save money for a down payment or to get it from a donor.
Banks, lenders, and mortgage brokers need to be able to verify you have the funds to buy a home, and that those funds are legitimate funds in some sort of a bankable paper trail bank account. Money sitting at home in a safe or cash obtained from side jobs can't be used to buy a home.
Importantly, money given to you as a gift to help with a down payment must come from a legitimate source. Any repayment of gift funds is not a gift. If, for example, a relative is giving you $40,000 to buy a home, he or she will need to provide an executed gift letter stating the money truly is a gift, and provide bank statements showing the ability to donate those funds. Lenders will require this for each and every gift amount. Federal regulations require banks to document all funds used in the transaction. As long as your mortgage lender can substantiate your funds from one of the eligible sources, you don't need to have lots of cash to buy a home. As a general rule, more income will be needed to offset the mortgage payment when a lower down payment is used to buy a home.
Remember, too, that a good credit score can help you net a competitive rate on your mortgage so you should check your credit before you apply for one. You can do so by pulling your credit reports for free each year from AnnualCreditReport.com and viewing your credit scores each month on Credit.com.
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