Acceptable Sources for a Down Payment When Buying a Home

Saving up for a down payment or finding acceptable/allowable sources of down payment money when buying a home is a common obstacle that delays or prevents many people from qualifying to purchase a home.  With a little thinking outside the box, you may have access to down payment money that you aren’t even aware of.

Below are fifteen sources to help you find money to satisfy the down payment requirement when buying a home.

Before you start making offers on homes, it’s important to work closely with an experienced mortgage lender so you can properly plan and document the source of your down payment, and address any concerns prior to making offers on a home.

1. Apply for a $0 Down Payment Loan Program

Stop assuming the only way you’ll ever be able to buy a home is if you save up 20%.  There are two excellent loan programs DO NOT require a down payment when buying a home.  And better yet, the total housing payment will actually be lower than if you were to use an FHA loan that requires a 3.5% down payment!

Qualifying is fairly easy for both.  Contact me for qualifying details.

2. Down Payment Assistance & Grant Programs

Most prospective home buyers (and mortgage lenders) are not aware that down payment assistance and grant programs exist to help meet your minimum down payment requirement.

Don’t need down payment assistance?  Then use the assistance funds to pay your closing costs.

3. Gift From Family, Friend, or Employer

Yes, it is OK for a family member, close friend, or employer can ‘gift’ you money to meet your down payment requirement.  However, before any money is received or transferred between accounts, contact me to make sure this is documented properly.

Having them give you a bag of cash is not acceptable.

HomeLoanArtist Pro Tip: Very few people know that FHA allows donors to borrower money to gift to the home buyer, as long as the home buyer is not a co-borrower on the note or a party to the transaction.  So go ask your parents to go further into debt for you:-)

4. Inheritance

Yes, an inheritance can be used as an acceptable down payment even if the money is not in your bank account yet.

5. Borrow From Your 401K for Down Payment

Retirement plans often allow employees to borrower up to 50% of the vested 401K balance to be applied towards a down payment when buying a home.

Borrowing from a 40K is like borrowing from your own bank.  You simply re-pay this back each month via a payroll deduction.  There can be downsides to this that should be discussed with your plan administrator and/or your CPA for any tax implications.

6. Business Funds

If you are self employed, there are provisions that allow borrowers to use money in a business bank account to be used for your down payment.  Guidelines require you document the business

7. Tax Refund

Simple enough.  Using your tax refund for down payment isn’t always the best use of that money read this article Eight Ways To Use Your Tax Refund When Buying  Home.

8. Withdraw From Your IRA

Liquidating or cashing out retirement funds is allowed, but you will end up paying taxes on this money.  Some IRA’s may waive the early withdrawal penalty if money is used to purchase a home for first time buyers.  Check with your plan administrator fro details.

9. Cash Out a Life Insurance Policy

Some life insurance policy’s have a cash value if ‘cashed in’ with little or no penalty.

10. Sell Investments, Stocks, Bonds, CD’s, Mutual Funds

Selling investments are acceptable sources.  Just need to document the sale and transfer into your account.

11. Sell a Car, Motorcycle, Boat, Jet Ski, Motor Home or Other Assets

Do you have $10,000 – $50,000 in big boy toys in storage collecting dust?  Make sure you make copies of the title, and document the sale and receipt of payment.  Cash transactions will not work…..make the buyer pay with cashiers check or money order.

11. Access Personal Savings

This is the most common and obvious source for a down payment, but if you had enough personal savings on hand, I’m guessing you wouldn’t be searching for sources of acceptable down payment.

12. Work a Second Job

I know…..not the best sounding option, but how badly do you want to own a home?  Home ownership will play a huge role to accumulating wealth 15-25 years down the road.

Guidelines do not allow income from a 2nd job to count as qualifying income unless you have a minimum two year history of working that second job.  However, if you don’t have two years history, the money you make from this job can still be applied towards the down payment.

13. Proceeds from Sale of a Home

Home owners who want to step up to a larger home or move to a different community can simply sell their home…..or sell your vacation home.  The difficult about selling your home and trying to buy a new home is getting both sale and purchase escrows to close around the same time.

14. Lawsuit or Insurance Settlement

Just need to document where the funds came from.

15. Gift From a Wedding Registry

It’s becoming more and more common for couples to forgo all the wedding gifts and ask attendees to gift or contribute to a bridal registry for the purpose of applying it towards a down payment.  Newlyweds cannot just deposit thousands of dollars of $1 bills from the dollar dance into escrow to pay the down payment or closing costs.  They need to prove (source) where the funds came from in order to determine it is from an allowable source…..the wedding.

If buying a parents home, the equity in the home can be ‘gifted’ to the buyer to satisfy the down payment requirement.

Work With A Creative Lender

Most lenders and/or loan officers do not want to work with buyers/borrowers who have obstacles to overcome or they don’t have the experience needed to fully understand how to structure a borrowers application to comply with the core guidelines set forth by the government (Fannie Mae, Freddie Mac, FHA, VA, USDA).

Most lenders only have one source to underwrite and fund their loans and have additional qualifying criteria that is referred to as ‘investor overlays.  This is makes it more difficult for borrowers to qualify.

If you are a homebuyer or homeowner in California and have questions about how much you will qualify for, credit repair, interest rates, fees, guidelines, or have been told you don’t qualify by another lender, feel free to call 951-215-6119 or contact me here and ask all the questions you want without concern of having to deal with a heavy handed sales shark trying to ‘close you’.


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