Raymond C. McMillan, BA., Mortgage and Real Estate Advisor – May 25, 2020
One of the biggest challenges facing young families and buyers looking to purchase their first home is finding the funds for the down payment and closing costs. Many will meet the credit and income requirements, but not many have sufficient savings or “wealthy” parents who are able to give them the required funds needed. However, with a plan and a goal, it is possible to get to your destination of homeownership. Here are just some of the sources of funds that can be used towards your down payment.
- Personal Savings and Investments
- Retirement Accounts – 401K/IRA (Individual Retirement Account) funds
- Income Tax Refund
- Gift from Family Member
- Lender Credit
- Vendor Concessions
- Down Payment Assistance Program
- Deposit to Builder
PERSONAL SAVINGS and INVESTMENTS is the perhaps the ideal path for those who are disciplined and focused in the quest to owning their first home. If your home buying goal is short-term, less than three years into the future, then you want to save or invest in financial products that are easily accessible, don’t fluctuate too much in value, and protect all of your original capital. These vehicles can be a high yield saving account, a term deposit, a money market account or a dividend mutual fund. So, if you are thinking about buying a home and haven’t started your savings plan yet, start now.
RETIREMENT ACCOUNTS which include your 401K and IRA are also a source of funds that can be used toward your first home purchase. You can borrow up to 60% of the value of your retirement account to put towards the purchase of your first home. There may be tax implications if these funds aren’t paid back within the specified period, so please consult with an accountant or tax professional to find out how this will affect you in the future.
INCOME TAX REFUND is an often-overlooked source of funds by many homebuyers. Instead of using the refund for a vacation, use it instead to build your legacy by owning real estate. Depending on the price of homes in your market and if you are purchasing by yourself or with a partner or spouse, your income tax refund may get you to homeownership faster than you could imagine.
GIFT from a FAMILY MEMBER is another source of funds for buying your first home. It is not uncommon for some parents to help adult kids with their home purchase. But not only parents are able to gift funds to the potential homebuyer. Funds can be gifted by siblings, grandparents, uncles, aunts and even godparents. Check with your lender to confirm what the guidelines are for gifted funds as each lender may have their own criteria.
LENDER CREDIT is another acceptable source of funds for your down payment and closing costs. This credit is usually a percentage of the amount of your approved loan and can range from 1-5% of the mortgage amount. It is important to note that the lender credit is usually given in lieu of a lower interest rate, so your cost of borrowing will be higher.
VENDOR CONCESSIONS are another often overlooked source of funds for homebuyers. These are the funds given to the home buyer by the vendor or seller of the property to facilitate the home purchase. Depending on the type of loan you qualify for, the vendor concession cannot exceed 6% of the mortgage amount.
DOWN PAYMENT ASSISTANCE PROGRAMS are another way to easily get into homeownership.Often overlooked by many potential home buyers, there are a multitude of first-time homebuyer grants available through federal, state, county and municipal governments. In our next blog, we will explore these in more detail. Some of the sates with the most attractive Down Payment Assistance Programs include; California, New York, Pennsylvania, Texas and Florida among others. If you visit the website of your county or city, it will usually show a list of available first-time home buyer grants.
DEPOSIT to BUILDER is an easy way to accumulate the required down payment when purchasing a pre-construction home from a builder. Most new homes can take as long as a year to two years to be completed, and for condominiums, it can take up to 5 years until your unit is ready for occupancy. There are two advantages to this process. Firstly, the purchase agreement may have an extended period over which the deposits must be given to the builder and it may include a series of small deposits over a period as long as 12 to 18 months. Secondly, because of the extended time it takes to occupy your new home, the value may be higher at closing than when you originally purchased it. So you would have by default accumulated equity in your new home before you even owned it.
The writer: Raymond McMillan is a mortgage broker and real estate consultant who has been in the banking, mortgage and real estate industry since 1994. He has been licensed as a mortgage broker since 1999 and has helped many people purchase their homes and invest in real estate. You can reach him at 1-866-883-0885 or visit www.TheMcMillanGroupInc.com