The Low-Down on Down Payments
If you’re like most people, you don’t have hundreds of thousands of dollars lying around, ready to spend on a home purchase at a moment's notice. Even though you can get a mortgage to cover most of the funds, a portion of the sales price is paid from your own funds. This shows the lender that you have some “skin in the game.” This percentage of money that you bring to the table is your down payment.
How much do I put down?
Most purchases require at least 5% down. There are some first-time homebuyer programs that require only 3% down, and an FHA loan only requires 3.5%. Investment properties and second homes usually require higher down payment amounts, typically 20%.
If you put down under 20%, you will have mortgage insurance as a part of your regular monthly payment. So putting down a full 20% can save you money each month as you won’t have that mortgage insurance tacked on. However, it’s not always the best option. It might be better for you to have more funds available in your bank account for any big purchases, life changes, or emergencies. Or, you could use additional funds to pay off other debts to reduce your monthly expenses that way, even if your mortgage payment is higher with mortgage insurance.
There are also closing costs to keep in mind when purchasing a home. 3% of the home's sale price is a good estimate. So for a $300,000 home, you would need to bring your down payment percentage plus closing costs to the table. However, you can negotiate to get a seller credit or a lender credit to cover some or all of your closing costs.
Where can I get a down payment?
Checking/Savings – If you already have funds saved up in a bank account, great! If you’re prepared to spend those funds, this is a simple and straightforward option.
Gifts – This isn’t the option for everyone, but parents or other family members might be willing to contribute toward your down payment. The donor will have to sign a letter confirming that the funds are a gift and not a loan. Gifts are also not allowed on investment properties, and can only be part of a down payment on a second home (must still have at least 5% of your own funds).
Take equity out of a different property – If you already own a home, you could sell your current residence and use the proceeds for the down payment on your purchase. You could also take out a second mortgage (HELOC) on your current residence so you could use the equity without selling your home. However, you would have to make enough income to qualify with the new purchase mortgage payment, your current mortgage payment, and the HELOC payment.
Taking a loan from your stock retirement account – Depending on your company’s plan, you may be able to take a loan from a stock or retirement account. This could be a long-term loan where a payment is deducted from your paycheck, or a short-term loan to be paid back in full within a certain time.
Liquidating stock or retirement accounts – You could also liquidate a long-term asset, but you would have to pay any taxes or fees needed in the process.
It’s also worth highlighting what can NOT be used as a down payment:
Cash – Any funds being used for closing must be “sourced and seasoned,” meaning they have to be in your bank account for 2 months or you have to document where they came from. If you have a nest egg in cash that you want to use, put it in a bank account ASAP so you will be able to use it when the time comes!
Funds from a personal loan such as a credit card advance or a personal line of credit
If you have further questions, give us a call! We’re happy to talk through different options.