Where You Can Find Money to Buy a Home
Think you can’t find any money for a down payment or the closing costs to buy a home in Southeastern Massachusetts? You may want to think again. There just might be some cubby holes that you haven't thought to look into yet.
First off ─ there are still 2 federally backed mortgage programs available where you can buy a home with no money down: the Veteran’s Administration (VA) loan and the US Dept. of Agriculture (USDA) loan. For VA loans, you must be either active duty military, a reservist, a member of the National Guard, or a veteran. For USDA loans, you must meet the income eligibility requirements, and the property you want to buy must be in an area where USDA lends.
If you don’t qualify for either of these programs and are in need of a mortgage, then you still have 3 other low-down payment options available. With MassHousing loans (available to first-time homebuyers in Massachusetts), you can buy a home with just 3% down. You can buy a home with a downpayment that is equal to 3.5% of the purchase price with an Federal Housing Administration (FHA) loan. For conventional or conforming loans, you’ll have to put at least 5% down on the purchase of a home.
The days of down payment assistance programs such as Nehemiah and AmeriDream as well as seller-provided down payments are long gone. Still, there’s at least 6 different ways you can come up with a enough money for the down payment and closing costs so you can buy a home.
You can use monetary grants you receive from certain organizations towards your downpayment and/or closing costs. A grant is just that ─ free money you don’t have to pay back. Acceptable sources of grants include:
- the borrower’s employer or labor union;
- a religious organization;
- a non-profit charitable organization; and
- a governmental agency or public entity that has a program providing home ownership assistance to low- and moderate-income families, or first-time homebuyers.
Gifts of Funds
Gifts of funds, or gift money, is a monetary gift that is provided with no strings attached. The giftor (the person making the donation) must be a relative or a close friend, and must sign a gift letter, provide a copy of a bank statement showing that he or she has the financial ability to gift the money, and show proof that the funds came from and has been withdrawn from his or her account.
They also have to attest that the money being donated to you is a gift and not a loan. The giftee (you) in turn has to sign the gift letter as well. And, you must show that the funds that were gifted to you were deposited into your account. Gift monies cannot be ‘mattress money’ or funds ‘dug up from your back yard’ or kept in a safe.
An outright gift of cash is acceptable if the donor is:
- the borrower’s relative, or
- a close friend with a clearly defined and documented interest in the borrower.
Family members can also provide a gift of equity credit in a property that is being sold to other family members. For example, your parents sell their $400,000 home to you for $300,000, and gift you the difference, or $100,000 in equity. The $100,000 gift of equity is considered a downpayment on the purchase of the home.
Incidentally, if you do have some ‘mattress money’ or money kept in a safe, you may want to consider depositing that into your account now. After 2-3 months, it will be considered ‘seasoned money’, and you will be able to use it to help you buy a home.
A Loan From Your 401(k) or Retirement Fund
You can borrow funds from your 401(k) or Keogh retirement account or its equivalent so you can buy a home. If you borrow money from your retirement account, you must be aware that this will be considered a loan, and the lender will include it in your total debt obligations and include the monthly repayments in your total debt-to-income ratio. Lenders will also use only 60% of the remaining balance as an asset for reserves after taking into account any tax penalties that you may incur for the withdrawal.
Be sure to have a discussion with your lender before you exercise this option. You want to be sure that you will stay within the total debt-to-income ratio for all monthly debt obligations, and that you will meet the lending requirments for the mortgage. You should also discuss this with your tax advisor or financial planner.
Sale of a Personal Asset
You can sell a car, a stamp or coin collection, art, an RV, or any other asset or assets that you may have, and use the proceeds from the sale towards the purchase of your new home. You will have to provide a satisfactory estimate of the value of those items. And, only the lesser of the estimated value or actual sales price will be considered as an asset to close.
You will have to document or ‘paper trail’ the transaction. For example, let's say that you decided to sell your car for $10,000, but it’s worth only $7,500. You'll need to provide your mortgage lender with a copy of the bill of sale as well as a copy of the bank statement showing that the entire amount was deposited into your account. Make sure you don’t include any other monies with the same deposit. You will also have to show an estimate of value for the car such as that from Kelly Blue Book. In this case, the lender will accept only $7,500 as funds that can be used towards your downpayment or closing costs. This applies to any other asset you may sell as well.
Trust Funds, Settlement Awards, Lottery Winnings and More
If you received or will receive a large sum of money from a settlement, a family buyout, an inheritance, a trust fund, a life insurance policy, or even lottery winnings, you can use the funds towards the downpayment and/or closing costs on the purchase of a home.
The source of the funds has to be fully documented and matched against the deposit into your checking, savings, or other liquid asset account. So be sure to deposit the entire amount you received. Again, make sure you don’t include any other monies with the same deposit. And keep all records related to the transaction(s).
Loans Made Against Assets
You can get a loan for the total required downpayment and closing costs ─ as long as you provide documentation to show that the loan is fully secured by an asset. These assets can include stocks, bonds, mutual funds, and real estate other than the property being purchased.
Certain types of loans that are secured against deposited funds, where repayment may be obtained through extinguishing the asset, are not included in the debt-to-income ratios. In addition, the funds that is securing the loan can not be included as an asset for reserves.
Funds borrowed from certificates of deposit (CDs) or from the cash value of life insurance policies can also be used towards the downpayment of a home as well as for your closing costs.
The following types of borrowed funds can not be used towards the downpayment or closing costs:
- unsecured signature loans,
- cash advances on credit cards,
- borrowing against household goods and furniture, and
- other similar unsecured financing.
While a down payment is needed in most cases to purchase a home today, smart homebuyers will also ensure that they have saved up or otherwise will have enough money to pay for closing costs and for moving expenses.
In general, you can anticipate that closing costs will be about 3 percent of the purchase price of the home. So, the total funds to make settlement on your new home with an FHA loan would be 3.5 percent for the down payment, plus 3 percent of purchase price for closing costs. However, you can have the seller assist you by providing the funds needed for the closing costs. If you wish to have the seller pay your closing costs, be sure that your real estate agent includes that in the negotiations with the seller’s agent for the purchase of the home.
The amount the seller can provide towards your settlement or closing costs will depend on the loan program that you’re applying for:
- For conventional loans, if you’re putting less than 10% down on a home, the maximum seller assist is 3% of the purchase price.
- For FHA loans, the maximum seller assist on closing costs is 6% of the purchase price.
- For USDA loans, there is no maximum, but anything over 6% of the purchase price must be explained and documented.
- For VA loans, the maximum seller assist on closing costs is 4% of the purchase price. However, the sellers can provide an additional 2% to be used towards points to buy down the interest rate on the mortgage.
If you will be receiving any money to help you with the downpayment and/or closing costs on the purchase of a home, be sure to talk to your mortgage lender beforehand so he can show you what you need to do to document the transaction(s). This will help you save a considerable amount of time and aggravation after the fact in trying to document the source or sources of funds.
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East Bridgewater, MA 02333
Lew Corcoran, ASP®, IAHSP, IAHSP-CB