You are ecstatic to finally purchase your own house. Mortgage rates are at their lows and you have found a property that’s reasonably priced. You check your cash on hand to pay the down. You immediately back out. You simply do not have the money.
Many have gone through a similar situation. They had to give up or postpone their homeownership plans thinking that they cannot afford the down payment. They look at their cash as the only source of funds for a down payment. This simply isn’t the case.
It cannot be denied that a down payment involves a huge deal of money. One has to look for ways to reduce his/her expenditures to save up for it. Yet, relying on this method alone will take you a couple of years to have that amount ready.
Let us explore other possible alternative sources of down payment and you get started with homeownership.
Use a Gift
Maybe, mom and dad or your grandparents are eager to help. You can use this cash gift to fully or partially fund a down payment to purchase a home. Do not be shy to take advantage of it.
The good thing about cash giftsit that it isn’t limited to your relatives alone. It can be from anyone you know who is willing to give you money for your down payment. It can be a wealthy friend or a generous boss.
As per tax laws, monetary gifts can be non-taxable as long as it does not exceed the maximum annual allowable amount. To learn more about it, you can read the IRS guidelines.
When using a gift, you have to make sure that you can prove that such money is not a loan and is not to be repaid. Otherwise, it won’t qualify as a monetary gift.
Borrow from your Retirement Savings Plan
We know that this money is intended for retirement, but there are still several more years before you can benefit from it. You may want to use it on important things like a house.
Your 401(k) savings plancan be a possible funds source. You have two ways to pull out money from it — make a withdrawal or loan the money.
When you withdraw, you will have to pay a penalty of 10 percent of the amount withdrawn. At the same time, the amount will also be taxed as income.
If you take out a loan from your 401(k), it will usually be less expensive than withdrawing it. But since it is a loan, you have to pay it back with interest. The difference from a straight withdrawal is that you won’t be charged a penalty and won’t be taxed if you take a loan.
Another source is the retirement money from your IRA funds. You are allowed to withdraw money from your contributions without any penalty or tax.
If you have kept the account for five years and are single, you may use up to $10,000 as down payment for your first home. Now, If you’re married and you and your spouse are first-time homebuyers, each of you can take advantage of the $10,000 fund.
The catch is you will have to spend the withdrawn money within 120 days. Failure to do so will have you liable for paying a 10 percent penalty.
Look for Down Payment Assistance
Many individuals believe that only those who are in great financial struggle can take advantage of down payment assistance. What they do not know is that there are many DPA programswhich cater to worthy, qualified homebuyers from moderate to low-income brackets.
There are numerous local, state and federal down payment assistance programs you can apply for. Each has their own set of qualification requirements. Many local institutions provide aid to deserving families and individuals that may contribute greatly to their immediate communities. The more people are placed inside homes, the stronger the society becomes.
Don’t give up on your homeownership dreams. Explore and study these alternative sources of down payment. One or a combination of these sources may be the answers to your down payment dilemma.