Gone are the days when mortgage lenders approved loans for the full buying price. Even subprime lenders dealing with borrowers with poor credit rating were willing to take these risks.
However, downpayment is almost always necessary now, although the amount may vary.
20% downpayment is considered to be the magic figure because it helps you avoid the additional cost of private mortgage insurance. You also do not have to pay property taxes in advance to the lender.
However even a 5% to 15% down payment helps in getting the home loan approved. The logic is simple. The more you invest in your mortgage the less likely you are to walk out on it in the future.
10 Steps To Overcome Shortfall For Downpayment
There can be many reasons why you do not have the available cash to make a substantial down payment on your mortgage. But if you’re resourceful, this can only be a temporary inconvenience. The problem can often be solved with a bit of motivation and discipline.
Even people with high incomes can have a problem making a downpayment because they do not have enough savings.
1) Change your spending habits
If you haven’t managed to save enough money in spite of a regular and good income that perhaps you should cut down on your monthly expenses. The easiest to cut down are nonessential expenses like eating outside, renting movies and shopping for gratification.
Taking help from family it is common enough. Parents lend money to their children. According to the taxation laws anyone can make a gift to somebody for $12,000 each. Each member of your family can receive $12,000 in a given year.
This means that both your mother and father combined can give you $24,000. If you have a spouse than this amount doubles and becomes $48,000. If both your parents and your in-laws are giving you this money as a gift then the amount becomes $96,000. This money given as gift is tax free.
2) Ask your employer/company
If you are relocating to another area because of transfer from your company you can ask if your company will be willing to make an advance on your down payment. Many companies provide mortgage assistance and in some cases help to buy the house outright, but this is usually reserved for senior executives. Even if you are not transferring somewhere you should inquire in your company if they have any program that gives assistance to the employers for purchasing home.
3) Use tax refunds
When you get a tax refund, don’t squander it as a windfall gain. Treat it seriously and save it up towards that mortgage down payment.
4) Withdrawing from retirement plans
The government allows you to withdraw up to $10,000 from your IRAs, provided you use the money to buy your 1st principal residence. To avoid a 10% penalty tax for an early withdrawal you must be a first-time buyer who hasn’t owned a home in the past 2 years prior to this.
The funds must be used within 120 days of withdrawal in order to purchase or build your home. Many 401K plans also permit borrowing for a mortgage down payment. You can check with your benefits office for more details.
5) Get money from existing real estate
If you already own a real estate or vacation home which has appreciated in time you can use the built-up equity to get additional cash. You can either refinance or take a HELOC. You must however understand that whenever you take on an additional loan it reduces your borrowing power according. This is true whether the loan in question is an unsecured personal loan from a credit union, or a secured loan like a car or boat.
7) Equity sharing
This method allows 2 or more people to buy a house jointly. Only one or more people may use the house as a primary residence. For example a non-occupant investor can pay the down payment and closing costs in return for 25% interest in the property. You remain 75% owner of the home and are responsible for paying the mortgage on as well as property taxes and insurance on the house.
Any increase in value is shared according to the terms of the equity sharing agreement either after a specified period of time or when the property is sold.
While this arrangement can be worked out between any people it is common between family such as brothers or children and parents. An equity sharing arrangement can be a profitable agreement for all parties involved. While you are able to make a larger down payment and qualify for a lower interest rate on the mortgage your parents can get tax benefits and profit from the appreciation in the house value in the future.
The most important thing to remember is that when making an equity sharing agreement you must consult a lawyer and make a formal legal document stating all the terms and conditions in order to avoid complications well as potential deterioration in personal relationships in the future.
8) Use state or federal programs for first-time buyers
Freddie Mac and Fannie Mae and the FHA along with many other states have financial aid programs designed to assist low or moderate income buyers in purchasing their 1st home with limited cash down ability.
9) Take private mortgage insurance [PMI]
Having to take private mortgage insurance may increase your closing cost and the loan origination cost. It is also likely to increase your monthly mortgage payment. But at the same time it allows people who are strapped for cash during the time of the mortgage to get that mortgage.
Usually any down payments that is less than 20% off the the borrowed amount calls for the borrower to take on the private mortgage insurance. This insurance might have to be paid to the lender in advance for a period of 6 to 12 months. It is kept in an escrow account and is dispersed by the mortgage lender.
10) Sell your assets
You can generate extra cash down payment by selling some of your assets such as stock options, shares etc. You must understand the tax implications of doing this and to cover for the state and federal capital gain taxes.