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The Down Payment
The amount of money required to have available for a down
payment can affect what types of loans you can
qualify for. Down payments typically range from 5 to 30 percent
of the sales price for the property. Here are some
valuable tips for accumulating a
down payment
- Save
Look for specific ways to reduce your monthly
expenditures to save toward a down-payment for
your new home. One way is to enroll in an automatic savings plan at
your bank to have a portion of your payroll
deducted into savings account. Most
people will need save a couple of years to
accrue enough money for their down
payment.
- Borrow the down payment from your
retirement plan
Check the provisions of your retirement plan.
You may be able to borrow funds from a 401(k) plan for a
down payment or make a withdrawal from an
Individual Retirement Account (IRA). Ensure you
understand the tax consequences, repayment terms
and/or possible early withdrawal penalties.
- Move
You can save additional funds if you
can move into less expensive housing area.
- Reduce other higher interest rate debt
Sometimes paying off credit cards will initially reduce
your savings, but the money you will save from
higher interest rates will pay-off in the long
run.
- Make a deal with the seller
In some circumstances, it is appropriate to ask
the home seller to carry a second-mortgage to cover
your down payment. However, you will probably pay a
higher rate for the second mortgage.
- Sell off some investments
- Get a second job and save your earnings
- Skip a year's vacation
- Gift from Family
Parents and other family members often
want to assist children in buying their first home
and they may have the ability to give you a gift of
money for a portion or all of your down payment
requirements.
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Alternative Sources
- No-down and low-down Mortgages
- FHA Loans
The Federal Housing Administration (FHA),
which is part of the U.S. Department of
Housing and Urban Development (HUD), plays a
significant role in helping low- to
moderate-income families qualify for
mortgages. FHA assists first-time buyers and
others who would not qualify for a
conventional loan, by providing mortgage
insurance to private lenders. Interest rates
for an FHA loan are usually the going market
rate, while the down payment requirements
for an FHA loan are lower than conventional
loans. The required down payment can be as
low as 3 percent and the closing costs can
be included in the mortgage amount.
- VA Loans
VA Loans are
guaranteed by the U.S. Department of
Veterans Affairs. Service persons and
veterans can qualify for a VA Loan, which
usually offers a competitive fixed interest
rate, no down payment and limited closing
costs. While the VA does not issue the
loans, it does issue a certificate of
eligibility required to apply for a VA loan.
- Piggy-back Loans
A second
mortgage that closes with the first. Often
the first mortgage is for 80% of the
purchase price and the "piggyback" is for
10%. The home buyer covers the remaining 10%
with their down payment. (Some lenders will
write a second mortgage of 15% or even 20%
of the purchase price.)
- "Carry Back" Mortgage
In the case of the seller "carrying back a
second mortgage", the seller loans you part
of his or her equity. In this scenario, you
would finance the majority of the loan with
a traditional mortgage lender and finance
the remaining amount with the seller.
Typically you will pay a slightly higher
interest rate on the loan financed by the
seller.
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Housing Finance Agencies
These agencies
offer special loan programs to low- and
moderate-income buyers, buyers interested in
rehabilitating a home in a targeted area, and
other groups as defined by the agency. Working
through a housing finance agency, you can
receive a below market interest rate, down
payment assistance and other incentives.
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The primary mission of
Housing Finance Agencies is to boost home
ownership in targeted areas, among
first-time buyers and those with little
money for down payments. Most of these
non-profit agencies were funded with state
government seed money and now operate
independently.
Click
here for a list of
Housing Finance Agencies.
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Documenting Your Down Payment
Documenting that the down
payment comes from your savings and that you
will have savings and/or assets over and above
the down payment will provide the lender confidence in
your strength as a borrower and your ability to
repay your home loan.
Take extra care to document
the sources for any monies to be used for the
down payment or closing costs.
Acceptable Down Payment &
Closing Costs Sources
- Cash in a bank
account
- Mutual funds /
stocks / IRA / 401K
- Proceeds from the
sale of another property
- Gift from an
immediate relative
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