Homebuyers understand that putting a down payment is one of the major requirements when purchasing a property unless they qualify to take out a VA or a USDA loan. Although homebuyers have flexibility when putting a down payment, most homebuyers still find it difficult to save.
Three percent (3%) is the lowest down payment you can put to buy a home. However, saving for a down payment is often a hurdle for most homebuyers. If you’re one of those who still find it difficult to save, here are a few down payment sources you may be interested to consider to fulfill your homeownership dreams.
Using gift funds for a down payment is probably your easiest route to homeownership if you’re from an affluent family who’s generous enough to give you money to buy a home. If you’re taking out a conventional loan and plan to put a 20 percent down payment, you can use the whole gift fund without having the need to contribute using your own funds. On the other hand, taking out an FHA loan could be your option if you have a credit score of around 500 to 580. When using gift funds, it’s important to keep in mind that there are important guidelines that you need to follow for mortgage lenders to determine that the gift you’re going to use is a legitimate gift from a legitimate source that you’re not required to pay back. Lenders typically will require your sponsor to write a letter and provide supporting documents to prove the gift.
401(k) retirement plans
Many would advise that it’s not sensible to borrow funds from your 401(k) and use it for a down payment to buy a house simply because you’ll have to repay for both mortgage and the 401(k) at the same time. However, borrowing from your 401(k) and using it for a down payment could be a viable option if you think you could repay the loan for a short period of time (e.g. within a year). You could borrow a large amount of cash from your 401(k) so you can put a 20 percent down payment. Buying a home with a 20 percent down means you’re not required to purchase a Private Mortgage Insurance or PMI. Avoiding PMI could help reduce your monthly mortgage payments.
If your family is growing and you want to sell your home to buy a new one, getting a bridge loan is worth considering if you’ve built enough home equity. A bridge loan enables you to immediately make an offer when the “perfect property” that you’re eyeing becomes available in the market. This allows you to put a down payment on a new home while you’re waiting to sell your current home. Some lenders allow borrowers to get a bridge loan if they have at least 20 percent equity or more in their home. Bridge loans are beneficial if your family wants to avoid the hassles and costs of having to move several times before finding the right home.
Consider other costs related to homebuying
While there are down payment sources that you can tap to buy a home, keep in mind that there are other costs that you may need to pay when closing on a new home. Closing costs, moving in costs, and insurances are just some of the additional costs that you need to prepare when buying a home other than the down payment.
Speak with a professional loan advisor
Saving for a down payment could be difficult for some homebuyers. If you find it difficult to save for a down payment, there are financial sources that you can tap to buy a home depending on your situation.
If you want to know more about these down payment sources, a professional loan advisor could provide you invaluable insights that best suit your situation as a homebuyer.