5 Creative Down Payment Sources for Home Buyers
Coming up with the down payment and closing costs is the most common reason renters give for not buying a home.
Gift funds are a great resource but many home buyers do not have a close relative that is in a position to give them money for a down payment with no expectations of repayment.
If you’re one of the many that gift funds are not an option, here are 5 creative ways to come up with your down payment that are accepted by most lenders:
1. Use Your Income Tax Refund as Down Payment
Lender guidelines typically require that you show that the money you are using for your down payment be in your accounts for at least 60 days before you can use it for down payment. This is called “seasoning” of funds.
In some cases, seasoning is not required – Using your Tax Refund is one of those exceptions.
If you receive a refund after filing your income taxes, this money is already considered seasoned and therefore does not require additional seasoning before being eligible to use for down payment.
Documentation: Make a copy of your tax refund check before depositing into your bank account.
2. Use Insurance Payout / Court Award as Down Payment
Monies received through an insurance payout or court award may also considered sourced and seasoned when it comes to meeting down payment guidelines.
It’s important that you are specifically awarded the payout from the insurance policy or court award. If the payout or award is granted to a business, organization or other entity you will need to provide a paper trail that names you as a recipient of the funds or documents your portion of the award/payout.
Documentation: Any paperwork showing the source of the money may be required.
For instance, if you receive money as the reward in a court case, you will need the actual court documents stating that the case has been resolved, naming you as the recipient of the award.
If you receive funds through an insurance claim, a copy of the claim and award may be required. Make a copy of any checks you receive before depositing money into your bank account.
3. Sell Personal Property to Raise Money
If you have large items lying around, like an automobile, that you can use the proceeds of the sale immediately as down payment on a home purchase.
Documentation: It’s important to document the sale as throughly as possible. If at all possible, make copies of documentation showing that you were the previous owner and that you had a right to sell said items – an example would be title to the automobile you’re selling.
A sales order, sales contract or receipt will also be required – make sure the amounts of the sale are consistent with the check or payment received for the property sold.
Make a copy of the check before depositing it into your bank account.
4. Borrow Down Payment from 401K or Retirement
Many 401ks or retirement plans may allow for a one time loan with favorable repayment terms for the purposes of buying a owner occupied home.
Money borrowed from your 401K or retirement plan is considered both sourced and seasoned and is acceptable to most lenders as a valid source of down payment.
Documentation: A copy of the borrowing guidelines from your 401k or retirement plan describing the ability to borrow for home buying will be required. Terms and conditions of the loan must be approved by the lender.
The terms of the payback of the loan are also required when qualifying you for financing. If funds from your 401k are sent directly to you in the form of a check, make a copy of the check before depositing it into your bank account.
5. Employer Buyer Assistance Programs
Some employers have buyer assistance programs available to help employees purchase owner occupied homes. If your employer offers a home ownership program, you may be able to use these funds as sourced and seasoned funds.
Documentation: You will need to fully document the terms and conditions of the employer loan and get it approved by your lender first. If you work for a guy and he scribbles out a page that says he’ll lend you money, that might be an issue – again, run it by your lender first to make sure the program is acceptable.
Once you’ve confirmed that the assistance program is acceptable to your lender, make copies of all checks and loan terms as payments will factored into your debt to income ratios and may affect qualifying.
Qualifying Note: Borrowing money for use as a down payment is typically not allowed except from special sources as described above. Since this money is received as a loan, the payments will be included in your debt to income ratios and may affect your qualifying.
Meeting Seasoning Requirements if Necessary
Should the paperwork or terms of any of these above options be a problem to your lender, depositing the money into your bank account and keeping it in there for 60 days will meet the seasoning requirements of most lenders.
It’s important that you communicate with your lender if you are planning to use any of these alternative methods for acquiring the down payment on your home purchase.
The biggest challenge that any of these options presents is documenting the paper trail that shows that you are entitled to the “pay out” or funds and the terms and conditions surrounding the receipt of these funds.
Worse case scenario is that you have to season the money (it has to sit in your bank account) for 60 days.
If you have any questions about any of these strategies or other buyer assistance strategies, feel free to ask questions below or shoot me an email and I’ll get back to you shortly.