Where can I find money for a down payment?
These are just a few suggestions of how to obtain money for the down payment
on your new home:
Get a tax-free gift - Do you know anyone who can give you a gift? Any taxpayer
is permitted to give up to $10,000 per year to another person without having to
pay a gift tax. A gift is documented with a letter stating that no repayment is
required. Children are permitted to receive up to $10,000 from each parent (for a
total of $20,000) in a one year period without having to pay taxes. A couple could
get gifts up to $40,000 from four parents all income tax free. Most lenders require
that at least a portion (typically 3% to 5% of the sales price) of the down payment
be your own money in addition to the gift funds.
Use a tax refund - Are you anticipating an income tax refund? If so, you can use
it as a part of your down payment. You can also raid other sources - coins in a
jar, the savings bond Grandma gave you, and so on.
Sell an asset - Do you have any property that can be sold to increase the
amount of money you have available? Real estate, collectibles, jewelry, antiques,
vehicles, boats, trailers, etc. are things you may own that can be sources of fast
cash. Borrowing against an asset may also be an option if you qualify with the
additional debt. Before choosing one of these options, consult your Loan
Originator so the transaction can be properly documented.
Ask the seller to help - Motivated sellers often find it advantageous to offer
special incentives to buyers. Your real estate agent can negotiate on your behalf
to have the seller pay for all or a portion of your closing costs when you make an
offer on a home. And, if the seller does not need all of the equity in his/her
property, having them carry some of the financing can reduce the amount of your
Liquidate or borrow against securities - Selling securities such as stocks and
bonds are yet another option. You could also consider liquidating a mutual fund
or cracking open a CD. Borrowing against securities is also a possibility.
Financial assets held by a bank or brokerage can be used as collateral for a loan
and because it is secured, the rate is usually lower than that on personal loans.
Many people use margin loans to buy securities, but if you have a brokerage
account, you can use the money for anything you want. This can be a better
alternative than selling if you qualify with the debt since there are not tax
implications, you hold on to a good investment, and you may be more likely to be
disciplined about paying back a margin loan than saving to replace your
Look at your life insurance - Does your life insurance policy have some cash
value? If so, you may be able to borrow from 75% to 95% of the cash value that
is built up. Repayment terms are usually liberal and often money that isn't paid
back will simply be deducted from your death benefit. Ask your agent to show
you in writing how your dividends and future cash values will be affected by the
loan and what impact that will have on your premiums over the years. Some
insurers reduce the interest or dividend they pay of the assets in your policy if
you have an outstanding loan, so it's important to check first.
Tap into your 401(k) or 403(b) - You can also access your 401(k) either by
borrowing against it or withdrawing cash. Each option should be weighted
carefully before making a decision - this is your retirement money after all. Most
experts agree however, that if you are taking money out for a home purchase,
tapping into your 401(k) or 403(b) can be a good choice. About 75% of
companies with 401(k) plans let you borrow against money in their plans. You
can usually access up to 50% of your vested balance or $50,000, whichever is
less, and the interest rate is often lower than the rates that banks are charging for
loans. Most plans require that the money be paid back within 5 years, but in the
case of a home purchase, that may be extended anywhere from 10 to 30 years.
What's the best thing about borrowing from a 401(k) or 403(b)? Because you're
borrowing the money from yourself, the interest you pay goes back into your own
account. It is also an inexpensive and convenient way to come up with a down
payment. The downside? If you leave your company without repaying the loan,
the amount of the unpaid balance becomes a distribution and not a loan. That
means that you will owe income tax plus a 10% penalty if you're under the age of
59-1/2. You can also withdraw money from your 401(k) or 403(b). This route is
only recommended if your company doesn't permit loans and you have no other
sources you can tap. The IRS permits hardship withdrawals to buy a home, but
you'll owe tax on the amount you take out - plus the 10% penalty.
Pull money out of an IRA or Keogh - Taking money out of your IRA or Keogh
account should probably be the last resort. Like a 401(k) or 403(b), if you take
money out of an IRA or Keogh before age 59-1/2, you will owe regular income
taxes plus a 10% tax penalty. (For an early withdrawal on a non-deductible IRA,
only the earnings are subject to taxes and penalties.) You can avoid the penalty
(but not the taxes) if you've become permanently disabled and have a doctor's
letter stating your condition will last at least 12 months. Another option is to take
the money out and pay it back within 60 days - you won't incur penalties or taxes.
In addition, the IRS allows you to remove funds at any age penalty-free if the
withdrawal is part of a series of "substantially equal distributions" for at least 5
years or until you are 59-1/2, whichever is longer.