Go Around The Downpayment Barrier
If you want to buy your first home but have not yet been able to, chances are it’s the downpayment requirement that’s stopping you.
According to the National Association of REALTORS®, the lack of downpayment savings is the biggest barrier to homeownership for many buyers.
It can be a challenge saving money when you’re paying monthly rent. Fortunately, there are ways to speed up the process by borrowing some or all of the required money down.
Fortunately, many loan programs today require a small downpayment, or none at all, making it even easier to raise necessary funds. Low-downpayment programs include the zero-down USDA loan and 3.5 percent down FHA mortgage.
When you still come up short, financing a downpayment can be a real option.
Tap Your 401k
Many companies allow employees to borrow from their 401k accounts.
Note that this is not the same thing as a withdrawal, which incurs all sorts of tax penalties and should be avoided.
When you borrow against your 401k, you essentially borrow from yourself. Because you are the creditor, mortgage underwriters don’t usually count the payment against your overall debt burden. If it were almost any other type of loan, such as auto financing, the payment could diminish your chances of qualifying.
For instance, a $250-per-month 401k loan payment would not increase your debt-to-income ratio in the eyes of a lender, as would a car loan.
However, hitting your retirement can have consequences — it reduces your retirement savings. In addition, if you leave your employer, you must pay off the loan in full or face tax penalties. Once you leave, any remaining balance is treated as a withdrawal.
Still, a 401k loan can be a solid option for the right home buyer.
Get A Second Mortgage “Piggyback” Loan
The piggyback loan allows you to put less than 20 percent down and avoid mortgage insurance.
It consists of an 80 percent first mortgage, a second mortgage, and usually a downpayment from the buyer.
The name of the loan package indicates the amount of the second mortgage and the downpayment. An 80/10/10 loan, for instance, combines an 80 percent first, a ten percent second, and a ten percent downpayment.
An 80/15/5 requires a five percent downpayment, and an 80/20 loan, which is rare or non-existent today, requires no downpayment at all.
Look For Sellers Who Offer Owner Financing
Owner financing is a type of piggyback loan in which the second mortgage portion is carried by the home seller.
Essentially, the seller becomes the bank, at least for a portion of the loan.
Often, seller financing, or the “seller carry” option comes with shorter terms. A seller carry can be structured so that there’s a balloon payment due in a few years, keeping the monthly payment smaller and helping you qualify for your mortgage.
Most primary mortgage programs require the balloon payment to be due at least five years from the closing date.
A balloon payment is one in which the entire balance is due at the end of a specified time period. It’s a good idea to avoid a balloon payment that comes with a short term.
Recent legislation requires individual sellers to base your interest rate on a published index, like the Prime Rate or LIBOR.
The rate must be fixed for at least five years, and it can increase no more than two percent a year after that, maxing out at no more than six percent over the starting rate.
For instance, if you received seller financing at five percent, it could not rise past seven percent the second year. The maximum interest rate would be 11%.
Hold Onto Money For 60 Days
Ask any lender if you’re allowed to borrow your downpayment with a personal loan or cash advance and they will probably say no.
However, there’s a point at which funds borrowed from elsewhere become, for all practical purposes, your own money. Typically lenders consider funds “yours” if they have been in your bank account at least 60 days.
At this point, the borrowed funds are said to be “seasoned.”
For instance, you take out a $25,000 personal loan for emergency cash and deposit it into your checking account. Six months later you decide to purchase a house.
The lender is not going to ask you to specify which funds in your checking are from the loan. It’s all just considered yours.
However, you will have to disclose the debt and the monthly payment, and that will be counted in your qualifying ratios.
Find Downpayment Assistance Programs
If you’re eligible for downpayment assistance from government, employer or charitable programs, you may be given a loan at low or no interest.
Often, the loan requires no repayment until you sell the property. Other programs may involve monthly payments, and in this case the debt will be counted in your qualifying ratios.
Note that the downpayment assistance must come from an acceptable source — not the seller, real estate agent, lender or anyone else who benefits financially from the home sale.
There are many short cuts to saving a downpayment, including borrowing it. Talk to a trusted loan professional about the best way to accelerate your home purchase and stop renting.
What Are Today’s Rates?
Mortgage lending is becoming more lenient, and lenders are willing to accept alternate forms of downpayment.
Now is the time to get a rate quote for your home purchase. Quotes require no social security number to get started and come with access to your live credit scores.