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Down Payment Assistance Programs and Other Ways to Make Your Down Payment
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| | 1.Employer Buyer Assistance Programs
Many organizations, such as universities, municipal agencies and corporations, offer home buying assistance programs to employees. In fact, some companies even offer relocation assistance programs in job packages to help attract top-level recruits.
Speak with your Human Resources representative to see if your employer offers similar down payment assistance plans.
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| | 2.Second Mortgage Loans/Down Payment Assistance Loans
Another option to help you meet your down payment is a “second mortgage loan.” This low-interest or zero-interest loan is often structured as a second, closed-end mortgage and it is used when buyers need to set money aside for a specific purpose, such as a down payment.
Make sure to review the terms and conditions of your second mortgage loan very carefully. The annual percentage rate (APR), closing costs, and prepayment penalties are key to deciding whether or not a down payment assistance loan is the right option for you.
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| | 3.Mortgage Credit Certificate Tax Credit
A Mortgage credit certificate (MCC) is another popular way for first-time homebuyers to raise down payment funds. This federal income tax credit helps buyers offset part of their mortgage interest to help qualify for the loan. The MCC helps reduce the tax burden for homebuyers, freeing up funds for the down payment and other expenses.
The mortgage credit certificate works by offering a tax credit based on the interest paid in the next year. For example, if your new mortgage is set to cost you $10,000 in interest for the first year, an MCC that offers a 25% credit will get you a $2,500 tax credit in the first year.
One significant benefit of the mortgage credit certificate is that you can continue to receive the credit for as long as you keep the original mortgage and live in the home.
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| | 4.Gift of Funds
A gift of funds from a friend or family member can be a great option for those struggling to come up with their down payments. In fact, if the gift is $13,000 or less, it doesn’t even need to be reported to the Internal Revenue Service!
Lenders typically require the benefactor to sign a “gift letter.” This letter should include the donor’s contact information (name, address, and phone number), the donor’s relationship to the buyer, the amount of the gift, the date the funds were transferred to the buyer, and the address of the property being purchased. This form will also certify that all gifted funds will not be subject to repayment (i.e. you do not have to pay your friend or family member back). Your lender may also request proof of funds from the donor, such as a bank or stock statement.
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| | 5.Borrowing Against Your 401k
Do you have retirement money in a 401k account? If you answered yes, you may have the option of borrowing against your 401k to help satisfy your down payment requirement.
Typically, most lenders suggest homeowners consider borrowing against, rather than cashing out of a 401k, for tax reasons. If a buyer borrows against their 401k, they may not be subject to any taxes or penalties, unlike when you cash out.
If you’re leaning towards cashing out of your 401k, rather than borrowing against it, make sure to read all of the fine print before you sign.
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| | 6.Choosing the Right Down Payment Assistance Program
Down payment assistance programs are offered by state housing finance agencies and local housing authorities around the country but they are often overlooked by homeowners who don’t think they’ll qualify. But the truth is, down payment assistance is available for a wide range of potential homebuyers in many different situations.
If you’re ready to purchase a home, don’t let the down payment scare you away! There are plenty of homebuyer assistance programs waiting to be used by potential homeowners like yourself.
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