Places to Find Down Payment Money
If you’re thinking of purchasing a home, chances are you’re aware of what you’ll need to do in general to get financially prepared. If applicable, promptly paying off any minor lingering debts would be helpful. You’ll want to refrain from purchasing any big-ticket items that involve a loan or having your credit checked to avoid reductions in your credit score. It’s wise, of course, to make sure your credit score is as high as possible. Pull your credit reports and look them over to make sure no errors are dragging your credit score down, and word to the wise – errors can take weeks to months to fix. You’ll also certainly want to shop around and compare mortgage interest rates between lenders. However, there is one sizable obstacle looming over many potential buyers, and that is coming up with enough down payment money. Most lenders require 20% down on conventional loans or require you to carry private mortgage insurance (PMI).
This predicament is especially relevant to millennials right now, as they have been getting hit by a double whammy. First, and most obvious, is the simple fact that due to low inventory and high demand, homes have gotten much pricier in recent years, making the 20% down payment seem unattainable. Secondly, in lieu of the Covid 19 pandemic, many municipalities and institutions have had to shift more focus on rental assistance programs, to avoid evictions… making down payment assistance (DPA) programs less of a priority.
Nonetheless, there are several viable ways to obtain down payment money. Many programs are geared toward moderate-income buyers or are location specific. Some require a bit of creativity and resourcefulness, while others necessitate a slightly more “hands-on” approach. In general, we always recommend discussing this subject at length with your lender, to ensure you’re both on the same page.
One common potential source of down payment assistance can come from gift money from a family member. There are tax implications, as family members will have to pay a federal gift tax for anything over the limit of $16,000 for single parents or $32,000 for couples filing jointly. You likely will also need to supply a gift letter to your lender stating what your relationship is with the giver, and the lender may ask to see their bank statements.
For first-time homebuyers looking for extra down payment funds, you’re allowed to borrow up to $10,000 from a Roth IRA without incurring a 10% early withdrawal penalty. If you have saved enough in this retirement account that you won’t be emptying it, this method can make a lot of sense. But keep in mind you’ll still have to pay regular income tax on the withdrawal.
In our state, Minnesota Housing has a few down payment loan options. There is a monthly payment loan for up to $17,000 fully amortized over 10 years, with an interest rate equal to the first mortgage rate, that repeats home buyers are eligible for. There is also a deferred payment loan of up to $15,000 that is interest-free for the length of the first mortgage term. Only first-time buyers are eligible, but you don’t have to repay the loan until you refinance, move, or sell the home and pay off the mortgage. The income limit for these two programs is currently between $67,000 to $157,000 depending on the county and household size. Additionally, in certain Twin City neighborhoods, you can sometimes pick up several thousand dollars of DPA if eligible… Washington, Ramsey, and Scott counties all have programs.
There are a few other methods to reduce the down payment burden. The FHA offers loans that require much less down, as little as 3.5%, and the VA requires 0% down if you qualify. In the Rochester market specifically, it can be feasible to obtain a USDA rural home loan once you’re outside of the city limits, and these also can be 0% down if qualified.
I’ll leave you with this. If you’re searching for extra money to throw at the down payment, you can always get “old school”. There are several time-tested methods buyers have utilized such as getting a part-time job, downsizing apartments, borrowing from a 401k, refinancing car loans, significantly tightening the monthly budget, or even selling personal property to drum up a couple of thousand bucks. At the very least, it can start you on your way to having adequate down payment money, or help cover closing costs on your new home.