Love Buying a Home Series – Week 5

My step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to closing day, and all the details in between. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks!

Coming up with a lump sum of money for a down payment can be scary and daunting to many first-time buyers. You definitely don’t want to wipe out your entire savings to purchase a home.

It doesn’t have to be a roadblock to homeownership!

Once you’ve got your monthly budget all set and know approximately how much home you can really afford (see the fourth article in this series), the next step is dealing with your down payment.

Here’s some guidance on where you can find cash for your down payment and also a rundown of some great homebuyer assistance programs that can help reduce the amount taken out of your own pocket.

How Much Down?

How much money you need for a down payment can depend on the type of mortgage you will get for your financing.

• Lenders of conventional loans may require 5, 10 or 20% down, depending on your credit and other factors affecting your financial picture.
• FHA loans can require as little as 3.5% down.
• If you are a veteran, you can put 0 down!

However, the amount you put down really depends on YOU.  If you’re a first-time buyer, don’t put all of your savings into your house. You may need some of that cash once you’re a homeowner.

Instead, put down just enough to buy the house and get a monthly payment that works for your budget right now.

These days, you don’t have to put 20% down to avoid paying monthly Private Mortgage Insurance (PMI).  Monthly PMI is typically not tax-deductible (check with your tax advisor since it depends on your situation), so most people want to avoid it.

A smart strategy for first-time buyers — who don’t have 20% down OR who don’t qualify for a first-time homebuyer program that helps get them to 20% down — is to have your lender increase your interest rate just slightly. This small increase will hardly change your monthly payment but is enough to avoid the “risk” of PMI or the PMI becomes tax-deductible.

Once you narrow down your mortgage options and take into account any homebuyer assistance programs, you’ll have a better idea of how much you’ll actually need for your down payment. Next week you’ll learn to sort through all the mortgage options out there so stay tuned for that!

Here’s a rundown of where to find the money for your down payment:

Help from Homebuyer Assistance Programs

If you’re a first-time buyer with a low to moderate income, you should look into these programs through the Michigan State Housing Development Authority as possible funds towards your purchase!

https://www.michigan.gov/mshda/homeownership/homebuyers/mi-home-loan

Should You Tap into Your Retirement Accounts?

You may have a nest egg of cash that you thought was off-limits! These options below may not be the best choice for you, but they are something to consider if funds are needed.

Keep in mind, you will need to follow some set rules to access this money, and should always consult with an advisor to clearly understand any tax implications.

• • Borrow From Your 401(k) Plan. Check with your employer to see if your 401(k) plan allows for loans. If you have less than $20,000 in the account, you can borrow the amount of your vested balance but no more than $10,000. (The maximum loan amount under the law is the lesser of one-half of your vested balance in the plan or $50,000.)

    Remember if you leave or lose your job, you may have to pay back the entire amount in 60 days or sooner. So be sure you understand any tax consequences, penalties, and charges as well as repayment terms.

  • Withdraw Funds From Your IRA. Usually, money in an IRA can’t be withdrawn before age 59 ½ without incurring a 10% penalty. However, you have no worries about a penalty if you’re a first-time buyer or someone who hasn’t owned a principal residence for two years prior to signing a binding sales contract. You can withdraw up to $10,000 penalty-free from an IRA for a down payment if you meet these requirements.

If you and your spouse are both first-time buyers, each of you may pull from your retirement accounts, giving you a total of $20,000 in cash.

Keep in mind, any withdrawals from a traditional IRA must be reported as income and taxes must be paid. This $10,000 is a lifetime limit — and must be used within 120 days of receiving it.

• Withdraw Funds From Roth IRA. The rules are a bit different if your nest egg is in a Roth IRA. The $10,000 you take out for your first home is a qualified distribution as long as you’ve had your Roth account for five years. This means you can take out your retirement money without penalty, and because Roth earnings are tax-free, you’ll have no IRS bill either.

Reach Out to Friends and Family

You might be reluctant to ask your family, but they can be a great source for your down payment. You will need to decide if this is a gift or a loan. Your parents might have done the same thing when they bought their first house!

• • • Gift from Family. Immediate family will often help with home purchases. Gifts up to $14,000 per year per person can be given without worrying about the gift tax. This means, for example, that every year your mother and father can give you and your spouse a total of $56,000 without having to file a gift tax return. Documentation is required so you need a letter stating that the money is indeed a gift with no expectation of repayment.

• • • Borrow from Family or Friends. You may prefer to ask for a loan rather than a gift from a loved one. However, your lender needs to know if you are borrowing from family or friends since they will consider this an additional debt for you. The lender will factor this additional debt into its own decision on whether to loan you money.

Boost Your Savings

This is one area where you have some control over and should start making an effort as soon as you even begin thinking about buying a home. The earlier you start, the more you can increase your personal savings.

• • • Tax Refund. Consider changing your withholding exemptions from 1 to zero. Your paycheck will be reduced but you’ll get a bigger check at tax time to use toward your down payment. That way you won’t use the money up during the year and will have a big chunk at the end.

• • • Deposit $$ in Bank Regularly. You’ve probably heard this before, but it does work: Get into the habit of putting the same amount of money into your savings after every paycheck. If you get paid every two weeks and save $200 from every paycheck, you will have saved more than $5,200 after 12 months. Not bad!

Getting a mortgage these days, especially for your first home, is definitely not “one-size-fits-all” these days.  Email me so we can set up a time to talk through the options and narrow them down to which one or ones are best for you and your particular financial situation and goals.

Next week get all the details in the Five Steps to Obtaining a Mortgage