Taking out a mortgage loan can be very expensive for most home buyers. Between all the fees and the down payment, you will usually have to spend tens of thousands of dollars before you can even move in your new home. The down payment that you make on your purchase will influence how much your monthly payment will be, and also how much you will be spending overall on your mortgage loan. Many times, the down payment will be the only thing standing between you and home ownership. Coming up with a large amount as a down payment can prove to be very difficult for most people, but, fortunately, there are alternatives that can help you.
The obvious thing to do is to take out money from your savings or sell some or all of your investments to come up with the money for the down payment. But sometimes that’s not possible, either because you have no savings or investments, or simply because you don’t find that to be a good option. In this article, you will find out about other down payment options for when you are short on cash.
Government Insured Mortgage Loans
Government backed mortgage loans, like the Federal Housing Administration (FHA) loans, the United States Department of Veterans Affairs (VA) loans, and the loans offered by the United States Department of Agriculture require a very low or no down payment. Besides this advantage, you won’t be required to pay a higher interest rate or Private Mortgage Insurance (PMI) because you didn’t make a down payment or your down payment was too low.
FHA loans are designed to help people with low incomes, who couldn’t afford a conventional mortgage loan. The loan is insured against default by the Federal Housing Administration, and requires a minimum down payment of 3.5 percent, which is significantly lower than the 10 to 20 percent required on conventional loans.
VA loans help current or former military members become home owners much easier. The loans are backed by the United States Department of Veterans Affairs, and require no down payment to be made by the home buyer who qualifies. The interest rate on a VA loan is comparable to the rates on a conventional loan.
USDA rural development loan are designed by the United States Department of Agriculture in order to increase home ownership in rural areas. Like the VA loan, there is no down payment requirement on a USDA loan, but the loan can only be used to purchase property in a rural area.
Take Out Cash from a Retirement Account
In order to come up with money for a down payment, you can also withdraw cash from retirement accounts, such as IRAs or 401(k)s. If this is your first time buying a home, you can withdraw up to $10,000 by yourself or up to $20,000 if you have a joint account with your spouse. Unless you have a Roth IRA, the money that you withdraw will be taxable, but you won’t be required to pay an early withdrawal penalty.
Taking out money from a 401(k) can also be done without paying a penalty, but your employer will have to okay the withdrawal, and the money will have to be returned within 5 years, with interest.
Get Help from Your Family
Many young home buyers receive help from their families when buying a home, especially if it’s the first time. The money must be received in the form of a gift, which can cover part or all of the down payment. However, you will have to provide your lender with proof that the money used for the down payment was a gift, and not a loan. A letter explaining the relationship between the person that gives the money and the person that receives it and the purpose of the amount given as a gift must be sent to the lender before they can approve the gift as a down payment.
Get Help from Your Employer
Some companies and organizations have come up with programs that are designed to help employees become home owners by giving them the money for the down payment as a low interest loan. These types of loans are like a second mortgage, so you will probably have to come up with part of the down payment. This makes them only useful if you want to make a 20 percent down payment and avoid paying for Private Mortgage Insurance.
Use the Equity in Your Home
Only applicable if you are buying a second home, using the equity in your home is a viable option of coming up with the down payment for a new home purchase. Using the equity as a down payment can be done in two ways: by doing a cash-out refinance or by taking out a home equity loan.
As you have read in this article, there are other options that can help you if you’re short on cash and can’t afford to make the large down payment that will make your interest rate lower and help you avoid paying for Private Mortgage Insurance. It would be a shame for the down payment to be the only thing to come between you and buying your dream home, so, hopefully, these alternatives will make becoming a home owner easier for you.